GBP/USD Exchange Rate Soars Post-BoE Interest Rate Hike
(Updated 14:30, 16/12/21) The Pound US Dollar (GBP/USD) exchange rate has risen roughly a cent today, after the Bank of England (BoE) surprised markets by voting to raise interest rates.
The BoE’s Monetary Policy Committee (MPC) voted 8-1 in favour of raising interest rates at its December policy meeting, with members citing concerns over the buildup of inflationary pressures in the UK as driving the decision.
This came as a major shock to investors as the consensus before the meeting was that the bank would maintain a ‘wait and see approach’ due to Omicron uncertainty.
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Pound US Dollar Exchange Rate Buoyed Following Fed Policy Decision
The Pound US Dollar (GBP/USD) exchange rate is trading with modest gains this morning as the pairing continues to benefit from the ‘Greenback’s post-Fed blues.
At the time of writing the GBP/USD exchange rate is trading at around $1.3295, up around 0.2% from this morning’s opening rate.
US Dollar (USD) Slips as Fed to Keep Rates on Hold While Tapering Process is Ongoing
The US Dollar (USD), is trading on the back foot this morning, following the sharp decline in USD exchange rates yesterday evening, following the conclusion of the Federal Reserve’s final policy meeting of 2021.
As expected, the Fed announced it would be accelerating the pace at which is winds down its pandemic-era quantitative easing programme, tapering its bond purchases by $30bn a month from January and wrapping up its stimulus measures by March.
The Fed also signalled it is likely to raise interest rates up to three times in 2022 as the US central bank seeks to tackle inflationary pressures, which the Fed no longer sees as being ‘transitory’ and driven solely by supply chain issues.
However, despite the fairly hawkish forward guidance, in his accompanying statement, Fed Chair Jerome Powell said that it would ‘not be appropriate’ to raise interest rates while the tapering process is still ongoing.
This prompted some of the more bullish investors to unwind their positions in the US Dollar, as it poured cold water on suggestions the Fed could start raising interest rates from the start of 2022.
Pound (GBP) Tempered by Disappointing PMI Reading
At the same time, the Pound (GBP) is facing some headwinds this morning, following the publication of the UK’s latest PMI figures, as Decembers’ preliminary figures highlighted a sharp slowing of economic activity in the service sector.
Markit reported its services PMI for the UK plunged from 58.5 to 53.2 this month, falling well short of the more modest fall to 57 that had been forecast.
The slump in activity appears to be directly tied to the Omicron Covid variant, which has sapped consumer confidence in recent weeks, and could weigh on the Pound US Dollar exchange rate in the coming weeks.
Duncan Brock, Group Director at CIPS, said:
‘Grim news for the UK economy in December as the positive gains over the last ten months were wiped out by yet another round of restrictions and curbs on consumers and businesses. Government restrictions associated with the latest covid variant introduced renewed hesitation amongst consumers.’
Pound US Dollar Forecast: Will a Cautious BoE Sink Sterling?
Looking ahead, the conclusion of the Bank of England’s (BoE) own policy meeting looks set to infuse volatility into the Pound US Dollar exchange rate later this afternoon.
While the BoE is no longer expected to hike interest rates this month, the bank’s forward guidance could still prompt some notable movement.
Should the BoE may adopt a more cautious outlook in light of the UK’s worsening Covid situation then the Pound will plummet, although publication of some strong employment and inflation figures earlier in the week could see the bank signal a rate hike for early 2022, bolstering Sterling.
There also remains an outside chance that the BoE could hike rates this month, in which case the GBP/USD exchange rate will likely skyrocket.
Meanwhile, the focus for USD investors this afternoon will be on the latest US PMI releases. Will some robust growth in the US services and manufacturing sectors help to bolster the US Dollar?