Pound US Dollar (GBP/USD) Exchange Rate Rebounds following BoE Bailey’s Comments
(Updated 16:25, 23/3/23) The Pound US Dollar (GBP/USD) exchange rate faced volatility today as markets responded to the Bank of England (BoE) interest rate decision.
After initially wavering lower, the Pound (GBP) rebounded against the US Dollar (USD) off the back of comments from BoE Governor Andrew Bailey. The chief central banker refused to say that interest rates had reached their peak, leaving the door open to another rate hike in May. Bailey said:
‘We don’t know whether it’s going to be the peak. What I can tell you is that we’ve seen signs of inflation really peaking now. But of course it’s far too high…. We need to see it starting to come down progressively and get back to target.’
These comments weren’t hawkish enough to give the Pound a notable boost, though they did help Sterling recoup earlier losses. Some analysts had expected the bank to indicate an end to its tightening cycle. Therefore, the prospect of another rate increase is a slightly more hawkish outcome than some had anticipated.
At the time of writing, GBP/USD is trading at $1.2328, up from an earlier low of $1.2275 and 0.4% higher on the day.
Attention now turns to the UK retail sales report and PMI surveys due out on Friday morning. Could positive British economic data see Sterling climb higher against the US Dollar?
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Pound US Dollar (GBP/USD) Exchange Rate Softens following BoE Rate Hike
(Updated 13:45, 23/3/23) The Pound US Dollar (GBP/USD) exchange rate has slipped from a six-week high today, despite the Bank of England (BoE) raising interest rates by 25bps.
After softening through the morning, the Pound (GBP) initially rose as the BoE hiked rates. GBP investors had anticipated the possibility of a pause in the bank’s tightening cycle, so the rise lifted Sterling.
However, the bank indicated that this hike may have been its last. In its accompanying statement, the BoE said:
‘[I]f there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required’.
Although this line suggests that the bank could increase borrowing costs again, the broad expectation is that UK inflation will start to fall sharply soon. If it does, the BoE may opt to hold rates at the current level.
Nevertheless, this small chance of another interest rate hike has prevented a steeper selloff in Sterling.
In addition, the BoE upgraded its economic forecasts. It no longer sees the UK falling into a technical recession. This cheerier outlook also cushioned GBP’s losses.
At the time of writing, the Pound US Dollar pair is trading at $1.2304, down from an earlier high of $1.2344. However, GBP/USD is still clinging on to yesterday’s gains.
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Pound US Dollar (GBP/USD) Exchange Rate Moves Above $1.23 following Fed Meeting
The Pound US Dollar (GBP/USD) exchange rate is trading just shy of a six-week high today as the US Dollar (USD) licks its wounds following the Federal Reserve interest rate decision last night. The focus now shifts to the Bank of England (BoE) meeting at noon, which could see Sterling pare its gains.
At the time of writing, GBP/USD is trading at around $1.2315, up 0.3% on the day but having edged down from a six-week high of $1.2344.
US Dollar (USD) Downbeat after Dovish Fed Hike
The US Dollar is on the defensive today after last night’s Fed decision saw markets scale back their expectations for further rate rises.
Although the US central bank delivered the expected quarter-point hike to interest rates, its communications took a dovish tilt.
In its statement on monetary policy, the Fed dropped its reference to ‘ongoing increases’ in the fed funds rate. Instead, the statement says:
‘The Committee anticipates that some additional policy firming may be appropriate’.
This toned-down language indicates that the US central bank is close to its terminal rate. Indeed, it’s possible that last night’s hike was the final interest rate increase of the bank’s tightening cycle.
Markets now see a 56% chance that the Fed will leave rates unchanged at its May meeting. This put notable pressure on the US Dollar, and the currency continues to languish close to a six-week low against the Pound (GBP) today.
Pound (GBP) Muted Ahead of BoE
However, Sterling itself seems limited ahead of the Bank of England decision.
Analysts broadly expect the BoE meeting to mirror the Fed one. A 25bps interest rate rise is highly likely (though not a forgone conclusion) but the bank may indicate that this could be the last hike.
Understandably, GBP investors are cautious today. This has seen Sterling trim its overnight gains against the ‘Greenback’, although USD’s weakness is keeping GBP afloat.
GBP/USD Exchange Rate Forecast: BoE Decision to Dent the Pound?
The Bank of England interest rate decision remains at the forefront of investors’ minds today. If the BoE does signal that today’s rate rise is that final one, GBP/USD could relinquish some of yesterday’s gains.
Another possibility, though less likely, is that the British central bank decides to keep interest rates on hold. If this were to happen, Sterling would probably slump dramatically.
Either way, the BoE decision is expected to trigger volatility in the Pound US Dollar pair.
The US Dollar, meanwhile, may remain subdued throughout today’s session.
Risk appetite could impact the safe-haven currency. The market mood is currently mixed – the Fed’s dovish tilt is cheering markets but worries about financial instability are keeping optimism in check. If the mood should sour, USD could recoup some losses.
Later on we have last week’s initial jobless claims figures. If they remain low, as expected, then signs of a robust US labour market may lend the ‘Greenback’ some support.