(Updated 16:45 03/02/22)The Pound US Dollar (GBP/USD) exchange rate has climbed today following the Bank of England’s (BoE) decision to raise interest rates from 0.25% to 0.5%.
With four of the nine policymakers at the BoE voting for an even steeper hike up to 0.75%, the unexpectedly hawkish tone boosted GBP.
A fall in US manufacturing orders may have also helped push up the currency pair. At time of writing the GBP/USD exchange rate is at around $1.3609, which is up around 0.3% from this morning’s opening figures.
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GBP/USD Exchange Rate Fluctuates as Investors Anticipate Rate Hike
The Pound US Dollar (GBP/USD) exchange rate has dipped slightly this morning ahead of today’s interest rate decision from the Bank of England (BoE). The central bank is widely expected to hike rates to 0.5% – but economists caution that the announcement may not be as hawkish as expected.
At the time of writing, GBP/USD is trading at $1.3553, down slightly from today’s opening levels.
Pound (GBP) Trades Mixed on BoE Uncertainty
The Pound is trending down against several peers today ahead of the BoE’s interest rate announcement. While a rate hike is expected, some say it will take more than raising interest to boost Sterling sentiment.
Investors want to know how the bank plans to unwind its £895 billion quantitative easing programme and whether or not further rate hikes will be needed later this year. Markets are close to pricing in a rate of 1.5% by the end of 2022, although BoE Governor Andrew Bailey has been quiet ahead of today’s announcement, giving little away.
Bloomberg economist Dan Hansen remarks:
‘The Bank of England has been eerily quiet since it unexpectedly raised rates in December. A clear desire to show it’s serious about price stability means a follow-up hike looks likely in February. Less certain is whether the central bank endorses market expectations for a steep ascent in rates this year.’
The uncertainty surrounding the central bank’s outlook means Sterling gains are capped; another factor weighing upon sentiment is the cost of living crisis. A rate hike alone cannot resolve the record-high price pressure now facing British families.
With inflation already at 5.4 percent and forecast to reach 7, households are preparing for a tax hike in April, and, more damagingly, a jump in the cost of electricity and natural gas. The BoE has no tools to mitigate energy costs directly, putting the onus on the government to step in.
US Dollar (USD) Supported by Cautious Market Mood
The US Dollar (USD) is recovering from yesterday’s downtrend this morning, as markets trade bearishly ahead of multiple interest rate decisions. US stocks futures indexes are down between 0.3% and 0.5% in line with a cautious market mood.
Continuing to support the ‘Greenback’ is an optimistic outlook regarding the Federal Reserve’s rate path. Several Fed officials have cautioned against aggressive policy speculation: nevertheless, analysts at the Bank of America predict up to seven interest rate hikes this year on account of ‘the hottest inflation in nearly four decades’.
Later today, initial jobless claims, December factory orders and the ISM non-manufacturing PMI will provide further trading impetus for USD. Jobless claims are expected to have fallen in the last full week of January, potentially lending upside support; on the other hand, the ISM PMI is forecast to reveal a decrease in service-sector activity.
Pound US Dollar Exchange Rate Forecast: BoE Decision Likely to Direct Movement
Looking ahead, the Bank of England’s interest rate decision will likely be the main driver of movement in the Pound US Dollar exchange rate today. If policymakers strike a hawkish tone, Pound upside could reverse GBP/USD losses.
On the other hand, if the central bank’s outlook for the year ahead is vague or dovish, Pound downside could ensue, sending GBP exchange rates lower.