The Pound US Dollar (GBP/USD) exchange rate dropped over the past week, as Federal Reserve interest rate expectations strengthened.
What’s Been Happening: USD Climbs amid Renewed Rate Hike Bets
At the start of the week, the US Dollar (USD) climbed amid a surprise return to growth for the service sector. This was then consolidated by geopolitical tensions after Russian President Vladimir Putin suspended the New Start nuclear treaty.
The latest Federal Open Market Committee (FOMC) meeting minutes lent further strength to USD. The committee showed they were broadly united on further rate hikes.
Finally, January’s core PCE price index showed US inflation was far stickier than expected. The unexpected rise in inflation piles more pressure is on the Fed to take action, leading to the US Dollar ending the week on a high note.
Meanwhile, the Pound (GBP) fluctuated over the last week. Similarly to USD, a strong services PMI reading lent some initial support. These gains were then consolidated by a hawkish speech from Bank of England (BoE) policymaker Catherine Mann.
However, a dearth of economic data left GBP vulnerable to domestic headlines at the end of the week. Foot shortages and waning Brexit optimism kept Sterling muted.
Three Things to Watch Out for This Week
- BoE Speeches
BoE Governor Andrew Bailey and Chief Economist Huw Pill are scheduled to speak on Wednesday and Thursday respectively. Could hawkish speeches buoy the Pound?
- US ISM Indexes
The latest ISM services indexes are expected to show the US service sector continued to grow at a solid clip in February, potentially boosting the US Dollar.
- Fed Official Speeches
Several Fed officials are due to speak throughout the week. If they maintain the central bank’s hawkish stance, USD could rally.
GBP/USD Outlook
Elsewhere, risk appetite could play a key role in shaping the GBP/USD exchange rate this week. With geopolitical tensions still simmering, further developments in the Ukraine-Russia war could prompt bearish trade. This would provide safe-haven flows to the US Dollar, lifting it over Sterling.
On the other hand, if a deal over the Northern Ireland Protocol is reached, GBP could strengthen.