Pound Tumbles on BoE’s Alarming Economic Forecasts, US Dollar Gains as Fed Raises Rates by 0.5%

  • Economic pressure on Russia increases
  • BoE gives gloomy future outlook for UK
  • Fed commits to taming inflation after raising rates
  • Slowing UK GDP to weaken Sterling?

GBP/EUR Exchange Rate: Truss Threatens to Tear Up NI Protocol

The Pound Euro exchange rate dropped sharply over the past seven days. A ban on service exports to Russia placed pressure on Sterling. The UK’s services sector accounts for 80% of the UK’s GDP. Further developments surrounding the Russia-Ukraine conflict may have limited drastic losses for the currency however. This came after Vladimir Putin remained cagey during his Victory Day address.

Sterling also saw fresh headwinds from the UK’s political sphere over the past seven days. Reports indicated that the UK government may attempt to introduce legislation to reduce its commitment to the Northern Ireland Protocol. Foreign Secretary Liz Truss was reported as saying she was ready to ‘tear up’ the agreement.

Looking ahead, the Ukraine-Russia conflict could continue to drive risk appetite in the markets. With negotiations between the UK and EU set to resume, the NI Protocol could also take centre stage once again.

GBP/USD Exchange Rate: BoE Warns of Possible UK Recession

The Pound US Dollar exchange rate fell dramatically following the Bank of England’s (BoE) interest rate decision on Thursday. The central bank announced a 1% rate hike in order to tackle spiralling inflation. The move brought borrowing costs to its highest point since the 2008 financial crisis.

It was the BoE’s forward outlook that was a central focus for investors however, with inflation forecasts revised upward to peak at 10% in 2022. The central bank warned that the UK could see a recession this year with soaring energy prices and a cost-of-living crisis in the UK. This gloomy outlook for the UK economy drove the GBP/USD to a near two-year low.

Looking forward for Sterling, a slowdown in GDP growth on Thursday could weigh heavily on the currency and pull it lower. Next week’s forecast rise to the UK’s rate of inflation could push the currency higher should investors see it as cause for more rate hikes from the BoE.

USD/GBP Exchange Rate: Fed Raises Rates but Disappoints Investors

The US Dollar Pound exchange rate made consistent gains over the past seven days following a rate hike from the Federal Reserve. The Fed rose rates by 0.5% on Wednesday following a 0.25% hike in March, and was its largest since 2000. USD slumped in the immediate aftermath of the announcement as markets had priced in a more aggressive move from the central bank.

The US Dollar regained its lost ground as the week went on however, with comments from multiple Fed policymakers strengthening confidence in the currency. Fed Chair Jerome Powell stated that inflation was ‘much too high’ and that the central bank was ‘moving expeditiously’ to tame it. A robust non farm payrolls reading also helped bolster USD exchange rates, with figures coming in well above forecasts at 428K.

Looking ahead, a forecast drop in US inflation figures later today could give credence to the Fed’s approach. Along with an expected drop to April’s PPI, USD could soften off the back of this data.

EUR/USD Exchange Rate: ECB Signals Rate Hikes in Coming Months

The Euro US Dollar exchange rate remained volatile over the past seven days. Positive German data saw the currency pair climb initially after a widening of Germany’s balance of trade in March. Private sector growth across Germany and the Eurozone as a whole was also mostly positive, which likely helped boost the single currency.

Expectations for an imminent rate hike from the European Central Bank (ECB) likely helped limit major losses for the Euro throughout the week. Multiple ECB policymakers signalled that they were open to raising rates in the coming months after Eurozone inflation hit 7.5% in April.

Looking to the next seven days for the Euro, a forecast drastic recovery to the Eurozone’s balance of trade on Monday could help the single currency to climb on Monday. If Eurozone figures print nearly unchanged as forecast then this could also limit losses for EUR.

Gareth Monk

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