Pound US Dollar (GBP/USD) Exchange Rate Drops Following BoE Decision

Pound US Dollar Exchange Rate on Downbeat BoE Forecast

(Updated 15:45, 04/08/2022) The Pound US Dollar (GBP/USD) exchange rate fell this afternoon following the Bank of England (BoE)’s interest rate decision. The central bank hiked rates by 50bps as widely forecast, but the raise was accompanied by a dovish speech which subdued Sterling appeal.

Policymakers at the BoE warned that the UK is heading for a recession in the final quarter of this year, as economic growth slows while inflationary pressures rise.

The bank cut its growth forecasts from its meeting in May, saying that ‘inflationary pressures in the United Kingdom and the rest of Europe [had] intensified significantly’; it explained further than energy prices had played a significant role owing to Russia’s restriction of gas supplies.

The Bank of England now expects inflation to peak at 13.3% – a significant increase which is likely to press workers into asking for higher wages. Yet the BoE’s Governor Andrew Bailey continues to warn against ‘very high’ wage increases, saying such an eventuality would fuel further inflation, causing the poorest in society to suffer for longer.

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GBP/USD Exchange Rate Firms as Investors Anticipate Rate Hike

The Pound US Dollar (GBP/USD) exchange rate is trending higher this morning as markets await the Bank of England (BoE)’s interest rate decision at midday. The US Dollar (USD) is on the back foot amid a stronger risk appetite.

At the time of writing, GBP/USD is trading at $1.2157, up 0.2% from today’s opening levels.

Pound (GBP) Buoyed by Risk-On Mood, BoE Tailwinds

The Pound (GBP) is enjoying widespread support so far today as investors hope for a 50bps interest rate hike from the Bank of England.

Forecasts have been mixed, with some economists sticking to projections of a 0.25% hike, but hawkish signalling from BoE policymakers has encouraged market optimism.

Soaring inflation has been in focus over the course of the week as researchers suggest that energy bills could hit £3,615 this winter. With this in mind, significant monetary policy tightening will be needed to curb ongoing price pressures.

In a recent speech at Mansion House in London, Bailey iterated:

‘Let me be quite clear: there are no ifs or buts in our commitment to the 2% inflation target. That’s our job, and that’s what we will do.’

The chief European economist at PGIM Fixed Income, Katharine Neiss,  says the central bank may use today’s meeting to put through one more substantive rate hike before the economy starts to soften – experts are already worried that the UK is approaching a recession.

Neiss comments:

‘There is broad agreement that the economy is set to cool further, but what remains an open question is by how much, and this is going to determine the path of policy going forward.’

US Dollar (USD) Drops as Market Mood Improves

The US Dollar is sinking across the board today, with analysts forecasting further falls for the US Dollar Index (DXY) – a measure of the ‘Greenback’s’ performance against a basket of other currencies.

Weighing upon the currency is Nancy Pelosi’s controversial visit to Taiwan – the US House of Representatives speaker flew to the island yesterday without the backing of US President Joe Biden, to reassure the government there of America’s support in the face of Chinese intimidation.

The visit stirred up existing tensions between China and the USA, with Chinese officials condemning Pelosi’s actions as a ‘serious violation of the One-China principle’ that will have a ‘severe impact’ on the political foundation of China-US relations.

Following Pelosi’s arrival in Taiwan, reports from Taiwan stated that 21 Chinese aircraft entered Taiwan’s Air Defence Identification Zone (ADIZ) in a show of force, reinforcing China’s message that it wasn’t afraid to respond to threats to its sovereignty.

In the aftermath of the visit, news sources report that US-China ties are ‘on a precipice’ as her trip has enraged Beijing and Chinese nationalists and upped ‘the risks of military confrontation’.

GBP/USD Exchange Rate Forecast: BoE Decision to Remain in Spotlight

Looking ahead, this afternoon’s interest rate decision from the Bank of England is likely to remain the predominant market mover for today. If the BoE hikes rates by 50bps, the Pound may climb – although Sterling sentiment is also likely to be led by the tone of the following press conference.

Elsewhere, America’s balance of trade is expected to reveal a reduced deficit, with exports having increased in June 2022. If this is the case, USD may enjoy some support. ‘Greenback’ upside may later be extended by an optimistic speech from the Federal Reserve’s Loretta Mester – a known hawk.

Olivia Evershed

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