Pound US Dollar (GBP/USD) Exchange Rate Plummets as BoE Ponders Rate Pause
(Updated 17:00, 21/3/23)
The Pound US Dollar (GBP/USD) exchange rate is tumbling this afternoon as investors pared back their rate hike expectations for the Bank of England (BoE). With uncertainty surrounding the decision, a growing expectation for the BoE to halt their tightening cycle has seen Sterling plunge.
At time of writing, the GBP/USD exchange rate is around $1.2195, a 0.64% plummet from this morning’s opening levels.
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Pound US Dollar Exchange Rate Wavers as Investors Brace for Crucial Week Ahead
The Pound US Dollar exchange rate is trading narrowly as investors eagerly await the Federal Reserve interest rate decision tomorrow.
At time of writing, the GBP/USD exchange rate is around $1.2257, relatively unchanged from this morning’s opening levels.
US Dollar (USD) Undermined by Interest Rate Pause Possibility
The US Dollar is fairly quiet this morning as investors continue to try and predict the interest rate decision tomorrow. With the markets in turmoil amid the banking sector crisis, expectations are growing for the Federal Reserve to pause their aggressive rate hike cycle.
Despite inflation remaining far above the Fed’s target rate of 2%, fears remain that further rate hikes could inflict further misery on the US banking system. However, US Treasury Secretary Janet Yellen has moved to assuage contagion fears in the banking sector by saying that the US government will step in and provide further support. Yellen also reassures the markets that the US banking system is stabilising. She added:
‘The steps we took were not focused on aiding specific banks or classes of banks. Our intervention was necessary to protect the broader U.S. banking system.
‘And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.’
Pound (GBP) Subdued amid Banking Sector Turmoil
The Pound (GBP) is trading without a clear direction this morning despite reassurances from the BoE that the UK banking system remains strong. Expectations of the central bank leaving the interest rates unchanged could be sapping demand for Sterling.
Meanwhile, government borrowing surged to the highest February on record. Public sector net borrowing was £16.7bn in February, as energy support schemes propelled borrowing figures. With the continuing surge in energy bills for both households and businesses, the government continued their support scheme. The borrowing figures have lifted the national debt to its highest level since the 1960s.
Ruth Gregory, Deputy Chief UK Economist at Capital Economics, said of the wider impacts:
‘The big risk is that a further escalation in the banking crisis causes a deterioration in the fiscal outlook as the hit to the public finances from weaker economic growth is only partially cushioned by lower gilt [UK government bond] yields.’
Further weighing on the Pound is the growing speculation that the BoE could leave the interest rate unchanged. With the banking sector still volatile, the central bank will be cautious of hiking interest rates again. If the BoE was to halt their tightening cycle, Sterling could plummet.
Pound US Dollar Exchange Rate Forecast: Fed Rate Decision to Sink the Greenback?
Looking ahead, the Pound US Dollar exchange rate could see further fluctuations with the Fed interest rate decision. If the central bank opts to pause interest rates, the US Dollar could plunge.
As for the Pound, the latest inflation reading is unlikely to sway the BoE too much from its own decision on Thursday. An expected easing from 10.1% to 9.9% is still far above the target rate of 2%, but the wider banking sector crisis could be more influential in the BoE’s interest rate decision on Thursday.