The Pound US Dollar (GBP/USD) exchange rate traded in a wide range last week as investors recalibrated their Federal Reserve interest rate hike expectations amid chaos in the banking sector.
What’s Been Happening: GBP/USD Fluctuates amid Banking Chaos
The US Dollar began on the defensive, as bets on further tightening from the Federal Reserve dropped substantially.
Between the collapse of Silicon Valley Bank (SVB) and a fall in both core and headline inflation, USD investors began to speculate the Fed will leave rates on hold this month.
A surprise fall in the Michigan consumer sentiment index coupled with nosediving US Treasury yields then applied additional pressure on the ‘Greenback’ on Friday.
Meanwhile, the Pound’s (GBP) initial gains were swiftly erased on Tuesday, following the release of January’s wage growth data. With wages cooling, GBP investors readjusted their bets on further rate hikes from the Bank of England (BoE).
With continued chaos in the banking sector, UK Chancellor Jeremy Hunt’s spring budget appeared to be a mere footnote. However, GBP managed to rally towards the end of the week, amid the weakness of its peers.
Three Things to Watch Out for This Week
- BoE Interest Rate Decision
The BoE will deliver its latest interest rate decision Thursday. A 25bps hike was previously forecast but recent banking sector turmoil makes this less certain.
- Fed Interest Rate Decision
In the meantime, the Fed will deliver its rate decision on Wednesday. Expect the US Dollar to plummet if the Fed leaves rates on hold.
- UK Inflation
The UK’s latest CPI data is due on Wednesday. Will a fall in headline inflation weigh on Sterling?
GBP/USD Outlook
Beyond the interest rate decisions, Friday brings the latest PMI flashes for both the UK and US. With the UK’s services sector forecast to show expansion, GBP could rally. However, with a parliamentary vote on the ‘Windsor Framework’ coming on Wednesday, signs of indecision could weigh on Sterling.