Pound US Dollar Plunges as US Labour Market Remains Tight
(Updated 15:00, 3/2/23) The Pound US Dollar is suffering further losses in the wake of the dovish Bank of England (BoE) interest rate decision and cautious outlook. A resurgent ‘Greenback’ heaped further pressure on Sterling as labour market data surprised to the upside.
US unemployment rate dropped to the lowest level since 1969, beating expectations of 3.6%. Meanwhile, non farm payrolls showed that the US economy had added 517,000 jobs, against an expected 185,000. The better-than-expected data comes after positive jobless claims and larger-than-expected increase in job openings, highlighting a resilient labour market. The Federal Reserve could look at the strong jobs market to support further rate hikes, boosting the US Dollar.
Meanwhile, a speech from BoE Chief Economist hardly inspired GBP investors today as he warned that the central bank must not push interest rates too high. Further hints of a slowing rate cycle could dampen investors’ spirits further.
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Pound US Dollar Exchange Rate Softens as Markets Brace for BoE Rate Decision
The Pound US Dollar (GBP/USD) exchange rate is slipping this morning as the Bank of England (BoE) is expected to raise interest rates by 50bps.
At time of writing the GBP/USD exchange rate is trading around $1.2341, a 0.27% fall from this morning’s opening levels.
Pound (GBP) Dips as BoE Expected to Raise Rates to 14-Year High
The Pound is remaining under pressure this morning as investors gear up for the BoE interest rate decision at midday. But despite an expected 10th consecutive hike, the fragile state of the economy is concerning both investors and policymakers.
The unwelcome combination of a weaker economy and higher inflation has left the central bank in a precarious position. With price pressures remaining elevated, another interest rate rise could exert further pressure on the flagging housing market. Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank, commented:
‘In one hand, the double-digit inflation continues taking a toll on the UK economy and on people’s lives. According to the latest data, food inflation in Britain hit the eye-watering level of 16.7% in the 4 weeks to January 22.
‘On the other hand, the rising rates take a toll on the British housing market.’
After the previous meeting saw a three-way split, another divided decision from the BoE Monetary Policy Committee (MPC) could be on the cards. A divided MPC could weigh on the Pound as investors don’t look on uncertainty favourably.
US Dollar (USD) Weakened by Dovish Fed Remarks
Meanwhile, the US Dollar is still licking its wounds after a sharp drop off in the wake of the Federal Reserve interest rate decision. Despite the 25bps rate hike practically baked in beforehand, the accompanying statement and press conference soured the mood further.
The smallest increase since March 2022, the slowdown in the Fed’s aggressive rate hike cycle has poured cold water on the US Dollar. The US Dollar Index is trading at its lowest level in 10 months after Fed Chair Jerome Powell’s dovish remarks. Powell attempted to convince markets that a rate cut will not happen in 2023 but the disinflationary process had begun. He added:
‘We covered a lot of ground, and the full effects of our rapid tightening so far are yet to be felt. Even so, we have more work to do.
‘If the economy performs broadly in line with those expectations, it will not be appropriate to cut rates this year.’
Pound US Dollar Forecast: BoE Rate Decision to Sink Sterling Further?
Looking ahead, all eyes will be on the BoE interest rate decision. The Pound US Dollar exchange rate could see a further slump if the BoE alludes to ending the tightening cycle.
Meanwhile, the US Dollar could see fluctuations with the release of a flurry of labour market data over the next day. A cooling jobs market could weigh on the ‘Greenback’ as employment is expected to slow further, with the unemployment rate expected to climb.