The Pound US Dollar (GBP/USD) exchange rate fell off a cliff last week, after the Bank of England (BoE) struck a dovish tone.
What’s Been Happening: BoE’s Dovish Stance Wrecks GBP
The Pound (GBP) started the week on a subdued note, with a risk-averse market mood keeping the increasingly risk-sensitive Sterling on the back foot. GBP then began to slide, as the International Monetary Fund (IMF) predicted that the UK economy would enter a recession.
As UK workers staged a 500,000 strong strike, Sterling remained muted. However, the Federal Reserve’s dovish pivot brought minor tailwinds to GBP as the market shifted to an upbeat mood. The Bank of England enacting a 50bps hike brought further support.
However, this was swiftly erased as BoE Chief Economist Huw Pill indicated that the tightening could soon end. With smaller hikes expected, Sterling fell substantially and closed the week on a very low note.
Meanwhile, the US Dollar endured a volatile week. Initially, safe-haven flows boosted the ‘Greenback’ ahead of the Fed’s interest rate decision.
With the dovish shift confirmed, USD rates plunged. However, a dramatic spike in US non-farm payrolls showed the US economy created 517,000 jobs. As such, increased hopes for further interest rate hikes allowed the US Dollar to recover.
Three Things to Watch Out for This Week
- UK GDP
Printing on Friday is the UK’s GDP data for December. A monthly decline of 0.3% is forecast, which may dent Sterling by illustrating the UK’s weakening economy.
- US Fed Speeches
Throughout the week, many Fed officials are scheduled to speak. Tuesday brings a speech from Fed Chair Jerome Powell. If he reiterates the dovish pivot, USD could slip.
- US Michigan Consumer Sentiment
The latest consumer sentiment index for the US is due on Friday. Little change is expected, which could cap the US Dollar’s gains.
Pound US Dollar (GBP/USD) Outlook
GBP/USD may have a quieter week, with speeches from the Fed playing a key role. If the Fed continues its dovish forward guidance, USD could weaken.