Pound US Dollar (GBP/USD) Exchange Rate Rises as BoE Hints at Steeper Rate Hikes

Pound US Dollar (GBP/USD) Exchange Rate Heads Higher as Markets Digest BoE Decision

(Updated 15:00, 16/6/22) The Pound US Dollar (GBP/USD) exchange rate rose following the Bank of England (BoE) decision earlier today. The upside came as the UK central bank left the door open to more aggressive rate hikes in the future.

The Pound (GBP) initially slipped after the decision. The BoE raised rates by 0.25 points, disappointing GBP investors who’d hoped for a 0.5-point hike. However, three of the nine-strong Monetary Policy Committee (MPC) opted for a steeper rate rise. And in the bank’s forward guidance, it signalled that larger hikes could be on the way:

‘The Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response.’

This gave Sterling a boost, although the upside is limited. The BoE’s economic forecasts are increasingly gloomy. Policymakers now expect inflation to rise to over 11% in October and UK GDP to fall 0.3% over the second quarter of 2022.

So, while GBP/USD is currently on the rise, there could be a lid on the currency pair.

Original article continues below:

Pound US Dollar (GBP/USD) Exchange Rate Slips as Sentiment Sours

The Pound US Dollar (GBP/USD) exchange rate is on the back foot this morning as risk aversion grips markets.

Last night’s Federal Reserve decision caused some turbulence. Now markets are bracing for the Bank of England’s (BoE) monetary policy meeting.

US Dollar (USD) Rises amid Risk Aversion

The US Dollar (USD) is strengthening this morning, as investors return to the safe-haven currency after last night’s turbulence.

At its meeting yesterday evening, the Federal Reserve raised interest rates by 75 basis points – the largest rate hike since 1994. Such a move would usually boost USD and ripple out through global markets, but traders had already mostly priced it in.

In addition, the Fed struck a much less hawkish tone than expected. Some analysts had believed that a 75-bps rate hike could pave the way for increasingly aggressive action, with 100-bps hikes potentially on the cards.

However, the US central bank pushed back on these expectations. Fed Chair Jerome Powell suggested that rate-setters ‘do not expect moves of this size to be common’. The Fed also signalled that it anticipates only a further 150-bps adjustment by the end of the year, leading markets to pare back bets of more muscular action. This saw USD slip.

However, since then the market mood has soured. Growth worries continue to weigh on risk appetite, which is driving investors back to the safe-haven US Dollar.

Robin Brooks, Chief Economist at the Institute of International Finance, believes a global recession is on the way:

Pound (GBP) Softens ahead of BoE Decision

Meanwhile, the Pound (GBP) is under pressure today, shedding its overnight gains, as the downbeat market mood dents the risk-sensitive UK currency.

GBP investors may also be subdued as they await the Bank of England interest rate decision at noon.

The BoE is broadly expected to raise rates by a further quarter percentage point, although a larger hike is a possibility.

Trade in Sterling may be muted in the run-up to the decision, with investors exercising caution ahead of a potentially volatile event.

GBP/USD Exchange Rate Forecast: Gloomy BoE Outlook to Hurt Sterling?

How could the BoE decision impact the Pound? It’s difficult to predict.

Markets have largely priced in a 25-bps rise, so such an outcome is unlikely to cause much movement.

If the bank hikes rates by half a percentage point, however, there could be a bigger reaction in markets. Normally this would support the Pound, but with warning lights flashing across the UK economy higher interest rates may simply add to the economic anxiety.

A crucial factor in GBP/USD’s trajectory will be the BoE’s forward guidance and economic forecasts. If the bank presents an even gloomier outlook for the UK economy – with higher inflation and lower growth – Sterling could slide.

Samuel Birnie

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