Pound US Dollar (GBP/USD) Nosedives despite BoE Rate Hike
(Updated 15:00, 17/3/22) The Pound US Dollar (GBP/USD) exchange rate slumped following the Bank of England (BoE) rate hike earlier this afternoon. GBP/USD fell by one cent from $1.32 to $1.31.
Despite raising the Bank Rate by 25 basis points, as expected, policymakers struck a dovish tone.
The Monetary Policy Committee (MPC) highlighted that the UK’s economic outlook has darkened. Officials expect growth and employment to be weaker than initially forecast, while inflation will rise higher, exacerbating the cost-of-living crisis.
The Monetary Policy Summary reads:
‘Turning to economic activity, UK GDP in January was stronger than expected in the February Report. Business confidence has held up and labour market activity data have remained robust.
‘Consumer confidence has, however, fallen in response to the squeeze on real household disposable incomes. That impact on real aggregate income is now likely to be materially larger than implied by the projections in the February Report, consistent with a weaker outlook for growth and employment, all else equal.’
As a result, the MPC is far less certain about the future of monetary policy. Immediately after the bank’s last meeting, markets began to expect an aggressive tightening cycle from the BoE. At this meeting, the MPC has pushed back hard on such expectations. Policymakers now believe that ‘some further modest tightening in monetary policy might be appropriate in the coming months’.
In response, GBP/USD slumped by 0.75%.
Original article continues below:
Pound US Dollar (GBP/USD) Exchange Rate Holds at Weekly High as Markets Brace for BoE
The Pound US Dollar (GBP/USD) exchange rate is trading near a one-week high today as Sterling’s risk-on rally continues.
With Russia-Ukraine peace talks appearing to make breakthroughs and Chinese policymakers announcing stimulus for China’s economy, markets are upbeat. As a result, the risk-sensitive Pound (GBP) is rising while the safe-haven US Dollar (USD) loses its appeal.
Pound (GBP) Climbs on Risk-On Mood ahead of BoE
The Pound is extending its upside today as markets remain upbeat about the prospects of a diplomatic solution to the Russia-Ukraine war.
Peace talks between the two sides seem to have been making progress in recent days. In a video address on Tuesday night, Ukrainian President Volodymyr Zelenskiy said that Russia’s position in negotiations was becoming ‘more realistic’. His tone was echoed in comments by diplomats and negotiators from both Russia and Ukraine.
Yesterday afternoon brought more positive news as the Financial Times reported that both sides had made ‘significant progress’ on a tentative peace agreement.
The Pound is particularly sensitive to news from Ukraine as the UK economy is highly exposed to spillover risks from the conflict, including higher energy prices and the fallout from economic sanctions. As a result, the positive news is supporting the Pound.
Additionally, the Bank of England (BoE) interest rate decision this afternoon may be lifting GBP, although it could also be limiting gains.
Economists expect policymakers to raise the Bank Rate by 25 basis points for a third consecutive time. This prospect of higher interest rates may be increasing the appeal of Sterling to investors, who would likely see higher returns.
However, the Ukraine crisis continues to cloud the UK’s economic future. GBP bulls may be wary of getting too aggressive in case the BoE strikes a cautious tone in its forward guidance.
US Dollar (USD) Subdued despite Fed Rate Hike
Meanwhile, the safe-haven US Dollar is giving ground amid the prevailing risk-on mood.
In addition to the positive tone around Russia-Ukraine peace talks, news from China is adding to the upbeat sentiment among investors.
In the early hours of Wednesday morning, GMT, Chinese Vice Premier Liu He reassured markets that Beijing would roll out new policies and stimulus to support the Chinese economy. The news sent Asian markets soaring, and it continues to add to the risk-on impulse today.
USD’s losses come despite the Federal Reserve raising interest rates for the first time since 2018 last night. The ‘Greenback’ rose ahead of the decision and slumped following it.
Markets had already priced in the rate rise, so USD may simply have suffered some profit-taking in a ‘buy the rumour, sell the news’ scenario. Other investors may have been disappointed that the Fed only hiked by 25 basis points.
GBP/USD Exchange Rate Forecast: BoE Decision in the Spotlight
Looking ahead, the BoE rate hike is in the spotlight for GBP traders. Even though markets expect a rate rise, such a move could still give Sterling a boost.
Traders may be more focused, however, on the bank’s forward guidance. Following the BoE’s last rate decision, policymakers sought to push back on expectations of an aggressive tightening cycle. Will we see something similar today? If the bank tries to rein markets in by highlighting the uncertainty caused by the Ukraine crisis, GBP may falter.
Risk appetite will also continue to be a defining factor in the GBP/USD pair. Although markets are upbeat about the Russia-Ukraine peace talks, some analysts are cynical about Russia’s intentions. UK Foreign Secretary Liz Truss has said that Russia is playing a ‘smoke and mirrors game’. The issue of joining Nato is a ‘smokescreen’, says Truss, and Russia really wants to create a new Soviet Union. Therefore, peace talks are merely a distraction.
Whatever Putin’s intentions, news from Ukraine will certainly continue to impact the Pound in the coming weeks.