Pound US Dollar Exchange Rate to Plunge to New Two-Year Low on Aggressive Fed Rate Hike?

Pound US Dollar Exchange Rate Steady Ahead of Fed meeting

The Pound US Dollar (GBP/USD) exchange rate is nursing its wounds this morning as markets brace for the Federal Reserve’s impending interest rate decision.

At the time of writing the GBP/USD exchange rate is trading at around $1.2020. Virtually unchanged from this morning’s opening levels.

US Dollar (USD) to Spike on 75bps Rate Hike?

The US Dollar (USD) is trading sideways so far this morning, with the currency’s recent bullish run on hold as investors brace for the Federal Reserve’s latest interest rate decision.

USD exchange rates have roared higher since the end of last week. Friday’s hotter-than-expected US inflation print prompted USD investors to reprice their Fed rate hike bets.

The Fed is now expected to raise interest rates by 75 basis points when it concludes its June policy meeting later this evening.

The Fed may signal today’s 75bps increase is the start of an even more aggressive rate hike cycle. The prospect of future 100bps hikes could trigger another sharp jump in the US dollar.

Meanwhile such an aggressive hike is likely to stoke global growth concerns. Fears of a potential recession will no doubt bolster the US Dollar’s safe-haven appeal.

Pound (GBP) Muted amid UK Economic Concerns

The Pound (GBP) is struggling to attract support this morning amidst ongoing UK economic woes.

Weaker-than-expected macroeconomic data from earlier in the week has done little to ease UK recession fears.

Sterling is also facing headwinds as a result of fresh political uncertainty.

The government’s plans to change the Northern Ireland protocol are unnerving GBP investors amidst fears it could trigger a UK-EU trade war.

Elsewhere the prospect of another Scottish independence referendum is also weighing on the Pound.

Pound US Dollar Exchange Rate Forecast: BoE Rate Hike to Disappoint Markets?

Looking just beyond the Fed’s rate hike decision, the Bank of England’s (BoE) interest rate decision on Thursday could drag the Pound US Dollar exchange rate lower.

The BoE is expected in deliver a 25bps hike this month. But in the face of a likely 75bps hike from the Fed and soaring domestic inflation, such a modest hike may look inadequate.

Michael Hewson, Chief Market Analyst at CMC Markets, suggests:

‘A 25bps hike tomorrow is likely to fall well short of what is required… It’s now clear that they are well behind the curve, and they need to address that.’

‘Tomorrow the bank faces two unpalatable options, hike by 25bps and watch the Pound slide below 1.20 towards 1.10 exacerbating the inflationary impulse further, or start to get out in front and hike more aggressively.’

If the BoE’s forward guidance is also dovish in tone then the Pound is likely to nosedive.

Meanwhile, the fallout from the Fed’s rate decision is likely to dictate movement in the US Dollar through the latter half of the week.

Matthew Andrews

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