Pound Firms as Markets Anticipate 25bps BoE Hike, US Dollar Plummets after Dovish Fed Meeting

  • Pound gains ahead of BoE decision.

  • US Dollar falls as Fed hikes by 25bps and signals policy tightening pause.

  • Euro slumps after ECB slows hiking cycle.

  • Markets fearful of US debt ceiling collapse and fresh banking crisis.

GBP/EUR Exchange Rate: Pound Firms amid BoE Rate Hike Bets

The Pound Euro (GBP/EUR) exchange rate made steady gains over the past seven days. Thin trading conditions left the Pound (GBP) at the mercy of shifts in risk appetite for much of the week. An upbeat market mood over much of the past week lent support to GBP.

Sterling was also bolstered by persistent Bank of England (BoE) rate hike bets. Markets continued to price in a 25bps interest rate increase from the central bank at their meeting this month. Some analysts even forecast at least one more hike in June.

The market mood soured as the week went on, however, which may have capped the riskier Pound’s gains against the safer Euro (EUR).

Ahead of the BoE’s decision, GBP could be affected by any changes in market mood. On Thursday, Sterling could surge higher if the BoE leaves the door open to more interest rate rises.

GBP/USD Exchange Rate: GBP Bolstered by 12-Month Service Sector High

The Pound US Dollar (GBP/USD) exchange rate climbed over the past week. The Pound was initially buoyed by an upward revision to the final reading of the UK’s latest services PMI. Performance in the UK’s dominant services sector rose to a twelve-month high of 55.9 in April. The PMI also indicated that firms passed on the costs of higher wages to consumers, adding pressure on the BoE to hike rates at its next meeting.

Some positive signs for the UK housing market also lifted GBP earlier this week. Mortgage approvals leaped in March to their highest point since October. On the other hand, a slowdown in house price growth dented confidence in the sector’s recovery.

Sterling saw an additional boost on Tuesday following the release of the British Retail Consortium’s (BRC) latest sales figures. April’s sales printed better than expected at 5.2% despite rising inflation and reduced household spending power.

Evidence of a 0.1% expansion in the UK’s economy in the first quarter of the year could lend GBP modest support on Friday. On the other hand, Tuesday’s unemployment data could temper Sterling’s gains if wage growth cooled as expected.

USD/GBP Exchange Rate: Dovish Fed Hike Prompts USD to Tumble

The US Dollar Pound (USD/GBP) exchange rate fell over the course of the past seven days. The US Dollar (USD) came under pressure on Wednesday following the Federal Reserve’s dovish rate hike. The Fed signalled that a pause in policy tightening was imminent.

Hotter-than-forecast jobs data on Friday failed to prevent the protracted downturn in USD amid fears of a fresh US banking crisis. April’s non-farm payrolls beat forecasts pointing to persistent strength in the US labour market, but banking jitters kept a lid on Fed rate rise bets.

The safe-haven ‘Greenback’ managed to regain some lost ground this week. USD benefitted from a pullback in global risk appetite on Tuesday as markets remained concerned over the possibility of a US debt default.

Easing core inflation could dent confidence in USD later today and dampen Fed rate hike bets. On the other hand, a forecast rise in April’s PPI could boost the US Dollar on Thursday and prompt bets on further Fed action.

EUR/USD Exchange Rate: 25bps ECB Rate Hike Weighs on EUR

The Euro US Dollar (EUR/USD) exchange rate slipped over the past seven days amid some volatile movements. The Euro (EUR) gained ground on Wednesday after an unexpected drop in unemployment. March’s rate fell to 6.5% – a new record low.

Thursday saw EUR tumble following the European Central Bank’s (ECB) interest rate decision. The ECB opted for a smaller 25bps rate hike and toned down its forward guidance. Despite hawkish reassurances from the central bank’s President Christine Lagarde, EUR slumped.

Disappointing data releases on Friday heaped additional pressure on the Euro. German factory orders slumped by more than forecast, whilst Eurozone retail sales saw a greater-than-expected fall. Renewed strength in the US Dollar amid a risk-off mood added to EUR’s woes.

Looking ahead, an improvement in German economic sentiment for May could help the Euro to recover lost ground on Tuesday.

Gareth Monk

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