Pound US Dollar (GBP/USD) Exchange Rate Falls amid Hawkish Fed Rate Hike Hopes
The Pound US Dollar (GBP/USD) exchange rate is weakening this morning, amid hopes of further hawkish tightening from the Federal Reserve.
At the time of writing, GBP/USD is trading around US$1.1942, a fall of roughly 0.3% from the morning’s opening rates.
US Dollar (USD) Rallies on Hawkish Fed Hopes
The US Dollar (USD) is gaining ground this morning, as USD investors continue to reprice their expectations of rate hikes.
Yesterday, Federal Reserve officials Loretta Mester and James Bullard both gave hawkish speeches in favour of 50bps hikes. As such, investors are betting on a higher hike next meeting and holding the terminal rate for longer.
Fed Mester stated yesterday that:
‘[The Fed] has come an appreciable way in bringing policy from a very accommodative stance to a restrictive one, but I believe we have more work to do. The incoming data have not changed my view that we will need to bring the fed funds rate above 5% and hold it there for some time.’
With recent data releases, such as the labour market remaining tight and an upside PPI surprise, the rhetoric has prescience. There appears to be room for further tightening, as US inflation appears to be proving stickier than hoped.
Further bolstering the ‘Greenback’ could be this morning’s bearish market mood. Due to the increased rate hike bets, riskier assets are seeming less appealing for investors.
Pound (GBP) Cushioned by Surprise Retail Sales Jump
The Pound (GBP) is lacking support this morning due to a risk-off market mood, but may be being cushioned by the surprise increase in retail sales.
January’s data showed an unexpected rise of 0.5%, far beyond the forecast of a fall of 0.3%. The Office of National Statistics (ONS) stated that this jump was mostly down to a fall in fuel prices, and store discounts.
However, the positivity over UK consumer’s spending ability is likely being muted by an overnight speech by Bank of England (BoE) Chief Economist Huw Pill.
In his speech, Pill appeared to give more credence to trepidation from the BoE. He stated:
‘Recognising that its earlier actions are now gaining traction, the MPC needs to ensure that it does enough to return inflation to target, while guarding against the possibility that it does either too much or – for that matter – too little.’
As such, GBP investors could be continuing on from yesterday’s anxieties over a rate hike pause, and are continuing to sell-off.
Pound US Dollar (GBP/USD) Exchange Rate Forecast: Private Sector PMIs in Focus
Looking ahead to next week for the Pound, data releases are thin on the ground until Tuesday. Then, February’s private sector indexes are to be published, with both services and manufacturing forecast to remain in contractionary territory.
With both sectors remaining downbeat, GBP may struggle for support. While the UK has currently avoided a recession, the economy is still showing signs of slowdown, and this could amplify fears that one is very imminent.
For the US Dollar, a lack of data on Monday followed by private sector PMI flashes on Tuesday. Both manufacturing and services indexes are forecast to remain in contraction, which could weigh on the ‘Greenback’.
Market sentiment is likely to drive the pairing on Monday, which may benefit the US Dollar over Sterling. If the mood shifts to bullish trade, however, GBP could rally.