US Dollar Leaps as Powell Points to Further Aggressive Rate Hikes, Pound Slips as Bailey Muddies Waters over Further BoE Action

  • Pound falls after cautious speech from BoE Bailey.

  • US Dollar soars as Fed’s Powell signals higher rate hikes.

  • Euro’s losses limited by hawkish ECB rhetoric.

  • Optimism over UK-EU Northern Ireland deal fades.

GBP/EUR Exchange Rate: Pound Drops amid Mixed Messaging from BoE

The Pound Euro (GBP/EUR) exchange rate dropped over the past seven days amid some erratic shifts. The Pound (GBP) slipped initially as optimism over the UK-EU Northern Ireland trade deal faded.

An unexpectedly dovish speech from Bank of England (BoE) Governor Andrew Bailey deepened losses for Sterling. GBP regained some ground after a more optimistic take from BoE Chief Economist Huw Pill, however. Hawkish comments from BoE policymaker Catherine Mann also lent support to the Pound.

A souring market mood prompted deep losses for the Pound on Tuesday, however. The shift in risk appetite came after a hawkish speech from Federal Reserve Chair Jerome Powell.

Looking ahead, expectations of the BoE’s forward policy could drive movement in Sterling. Any developments regarding the new Northern Ireland protocol deal – the ‘Windsor Framework’ – could also prompt shifts in the currency.

GBP/USD Exchange Rate: Sterling Slumps after Poor Data Releases

The Pound US Dollar (GBP/USD) exchange rate fell over the past week after some volatile movements. A pullback in BoE rate hike bets weighed on the Pound on Wednesday after Governor Andrew Bailey signalled that rates may have peaked.

Sterling regained some lost ground on Friday after the final reading of February’s services sector PMI. The data was revised higher indicating that the sector expanded at its fastest pace since June 2022. The figures also boosted hopes that the UK could avoid a recession.

GBP began its decline on Tuesday amid a pullback in global risk appetite. Poor retail sales data also weighed on the Pound. Whilst the British Retail Consortium’s (BRC) sales monitor rose by 4.9% in February, the increase was largely motivated by soaring price inflation.

Looking to the coming week, Friday’s GDP figures could boost Sterling if the UK economy expands as forecast. Employment data on Tuesday could also push the Pound higher if wage growth remains strong.

USD/GBP Exchange Rate: US Dollar Hits Multi-Month Highs after Powell Testimony

The US Dollar Pound (USD/GBP) exchange rate climbed to a four-month high over the past seven days. The US Dollar (USD) saw some losses at the opening of the past week, however. February’s manufacturing PMI fell more than forecast, pointing to a persistent slowdown in the sector.

Hot labour market data on Thursday pushed USD higher, however. Jobless claims came in below forecasts at 190,000, which markets took as a sign of a still-tight labour market. The data also bolstered bets on further Fed rate hikes.

USD leapt after Fed Chair Jerome Powell’s testimony on Tuesday. Powell signalled a possible acceleration in the Fed’s tightening cycle, catapulting the US Dollar to fresh highs against the Pound.

The latest non-farm payrolls figure on Friday could boost USD further if the US labour market remains strong. On the other hand, an expected slip in headline inflation on Tuesday could dent Fed rate hike bets and pull USD lower.

EUR/USD Exchange Rate: Euro Underpinned by Persistent ECB Bets

The Euro US Dollar (EUR/USD) exchange rate slipped over the past seven days, although the Euro (EUR) rallied initially. EUR found support from persistently high German inflation as headline inflation in the country held fast at 8.7%.

A rise in core Eurozone inflation on Thursday pushed the Euro higher. This data prompted fresh bets on further action from the European Central Bank (ECB). Data on Friday dampened these bets, however, as Eurozone PPI contracted by more than expected.

Hawkish comments from various ECB officials kept the Euro on the rise. Renewed strength in the US Dollar sapped demand for EUR on Tuesday, however, due to the currencies’ negative correlation.

Looking to the coming week, the final reading of Germany’s February inflation could bolster the Euro if it prompts renewed ECB bets. A speech from ECB President Christine Lagarde on the same day could have a similar effect.

Gareth Monk

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