Pound US Dollar (GBP/USD) Exchange Rate Strengthens as Markets Pare Fed Hike Bets
(Updated 17:00, 13/3/23) Although the Pound US Dollar (GBP/USD) exchange rate faced some mixed movement today, it eventually pushed higher to touch a fresh three-week high.
The upside in GBP/USD comes as markets massively scale back Federal Reserve interest rate rise bets. Signs of financial instability in the US, due to rapidly rising interest rates, may see the Fed pause its tightening cycle sooner than expected.
These dwindling bets on a rate rise next week weighed on the US Dollar (USD) through today’s session.
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Pound US Dollar (GBP/USD) Exchange Rate Volatile amid Market Uncertainty
The Pound US Dollar (GBP/USD) exchange rate has fluctuated today amid the market turmoil following the collapse of Silicon Valley Bank (SVB) on Friday.
At the time of writing, GBP/USD is trading at around $1.2115. The pair dropped from a three-week high hit overnight and then bounced back in mid-morning trade.
US Dollar (USD) Undermined by Declining Fed Bets
The US Dollar (USD) initially strengthened against the Pound (GBP) this morning as a downbeat market mood lifted the safe-haven ‘Greenback’ against the riskier UK currency.
Markets are deeply in the red after SVB US collapsed on Friday. Although US authorities brought in emergency measures over the weekend to limit contagion risks and restore confidence in the American banking system, investors are still jittery today.
George Godber, a fund manager at Polar Capital, said that ‘a fear of what else might lie out there’ is driving today’s risk aversion. Godber commented:
‘The imminent crisis may have been averted but it’s alerted people to the fact that there’s a group of companies out there with business models who will struggle in a high interest rate environment – as that’s what’s undone SVB’.
However, while the risk-off mood initially aided USD, markets have also pared back Federal Reserve interest rate rise bets. With signs of fragility in the US financial system due to high interest rates, Fed policymakers may resist further tightening.
Last week, the odds for a 50bps rate hike at the Fed’s meeting briefly touched 80%. Now, the odds for a half-point hike are 0%. This is keeping pressure on USD, despite the downbeat mood.
Pound (GBP) Unable to Strengthen amid Risk-Negative Trade
Meanwhile, the Pound is unable to press the advantage as GBP investors are worried about the risks to the UK financial system.
The British government has backed a rescue deal for SVB UK, which is being bought by banking giant HSBC for £1. While this has saved the funds of thousands of customers – including investors and tech startups – it highlights the UK’s vulnerability to global contagions.
Conversely, expectations of narrowing policy divergence between the Fed and the Bank of England (BoE) may be supporting Sterling, keeping it trading close to its three-week high against USD.
GBP/USD Exchange Rate Forecast: High-Impact Data to Cause More Volatility Tomorrow?
Looking ahead, the Federal Reserve is holding a closed-door emergency meeting this afternoon to discuss the SVB collapse and the implications for the financial system. Any measures announced following the meeting could cause further volatility for the ‘Greenback’.
Turning to tomorrow, high-impact UK and US economic data could see more fluctuations in GBP/USD.
First of all, the UK’s latest labour market report is due out. Economists expect the British unemployment rate to tick higher while wage growth slows, indicating a cooling labour market. If the data prints as forecast, a pullback in BoE rate hike bets could dent Sterling.
The latest US inflation data is then out in the afternoon. A forecast decline in both headline and core inflation could further weigh on Fed expectations, thereby dampening USD’s appeal.