The Pound US Dollar (GBP/USD) exchange rate began the past week trading within a narrow range. A risk-on mood helped to limit losses for the Pound (GBP). On the other hand, this risk appetite and a downturn in bond yields kept the US Dollar muted.
Wednesday saw the currency pair spike after the Federal Reserve disappointed investors by pushing back against forecasts for a 75bps hike from the bank in the future. The GBP/USD exchange rate then plummeted on Thursday following the Bank of England’s (BoE) interest rate decision.
What’s Been Happening: Fed Disappoints Investors whilst BoE Warns of Recession
The Pound’s (GBP) movements last week were largely dominated by the BoE’s interest rate decision. Investors limited significant bets on the currency ahead of Thursday’s meeting leaving the currency subdued against its rivals.
Whilst the BoE voted to raise rates by 0.25%, the bank’s dire economic forecasts sent the Pound into freefall. Policymakers warned that the UK is heading for a recession as the cost-of-living crisis worsens. The BoE also revised its inflation projections for 2022 higher to 10%.
The US Dollar saw a mid-week slump following the Fed’s decision to raise interest rates by 0.5%. The hike was the largest since 2000 but was still a disappointment to markets.
USD managed to recover some of its losses before week’s end, however. A risk-off mood in the markets, underpinned by the war in Ukraine and a selloff in equity markets, underpinned demand for the safe-haven ‘Greenback’.
- Fed Speeches
Speeches from multiple policymakers may give an insight into last week’s interest rate decision. Will they maintain a hawkish tone?
- US Inflation
US inflation is forecast to have begun to slow in April, will this prompt more USD investors to revise their Fed rate hike expectations?
- UK GDP
GDP figures are expected to remain unchanged, but could a forecast slowdown to GDP growth further dent confidence in Sterling?
The Pound US Dollar exchange rate could strengthen if a drop to US inflation weakens Fed rate hike expectations. Additionally, a slowdown to UK GDP growth could push the currency pair lower off the back of a poor outlook for the UK economy.