GBP/USD Exchange Rate Nosedives as BoE Forecasts Stoke Recession Fears
(Updated: 14:20, 5/5/22) The Pound US Dollar exchange rate has plummeted almost 2% to its worst levels since July 2020, in response to the BoE’s latest economic forecasts.
While the bank concluded its May policy meeting with another 25bps interest rate hike, the accompanying forecasts have stoked fears the UK could be headed towards a recession.
The BoE now expects domestic inflation to climb as high as 10% in 2022, whilst also warning that inflationary pressures and a rise in energy prices could trigger a near 1% contraction of growth in the last quarter of the year.
Meanwhile, the US Dollar continues to attract support as demand for the safe-haven currency is buoyed by risk-off trading sentiment.
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Pound US Dollar Exchange Rate Rocked by Fed Rate Decision
The Pound US Dollar (GBP/USD) exchange rate is trending lower this morning, as the pairing relinquishes nearly all the gains following the Federal Reserve’s policy meeting on Wednesday.
At the time of writing the GBP/USD exchange rate is trading at around $1.2526, down roughly 0.7% from this morning’s opening levels.
US Dollar (USD) Fluctuates Following 50bps Fed Rate Hike
The US Dollar (USD) fell sharply in the wake of the Federal Reserve’s latest interest rate decision on Wednesday.
As was widely expected, the Fed announced its first 50 basis point increase since 2000. Raising the Fed’s benchmark interest rate to a target rate range of between 0.75% and 1%.
The 50bps point hike comes as the US central bank steps up its efforts to tame soaring domestic inflation, which the Fed conceded was causing ‘hardship’ for US consumers.
Fed chair, Jerome Powell said:
‘Inflation is much too high and we understand the hardship it is causing. We are moving expeditiously to bring it back down.’
Despite this, Powell dismissed suggestions the Fed could follow up this month’s interest rate increase with a 75bps hike in June. The resulting disappointment from USD bulls triggered a sharp slump in the US Dollar yesterday evening.
However, this knee-jerk reaction was quickly reversed in overnight trade. The prospect of several more interest rate hikes from the Fed and an uptick in US Treasury yields reviving demand for the US Dollar.
Pound (GBP) to Plunge on ‘Dovish’ BoE Rate Hike?
Meanwhile, the Pound (GBP) is on the back foot this morning ahead of the Bank of England’s (Bo) latest interest rate decision.
The BoE is also expected to raise interest rates this month, although only by 25bps points.
The reaction to the hike itself may be limited as it has been largely priced in by GBP investors already.
Instead, the primary focus will be on the BoE’s forward guidance. In light of some worrying UK data and the uncertainty caused by the war in Ukraine, the BoE is likely to adopt a more cautious outlook. An outcome which is likely to undermine Sterling.
There also remains the risk that the BoE will live up to its reputation as an ‘unreliable boyfriend’. With the Pound poised to plunge if the bank opts to leave its monetary policy unchanged this month.
Pound US Dollar Exchange Rate Forecast: Robust US Payrolls to Boost the US Dollar?
Looking past the BoE interest rate decision to the end of the week, the primary catalyst in the Pound US Dollar exchange rate will likely be the publication of the latest US non-farm payrolls.
Expect to see the US Dollar push higher again if the US economy added another 400,000 jobs in April as forecast.
Meanwhile the focus for GBP investors will be on the outcome of the UK local elections. A disappointing showing by the Conservatives could revive calls for Boris Johnson to resign infusing fresh volatility into the Pound.