Pound US Dollar (GBP/USD) Exchange Rate Wavers on Central Bank Dynamics
The Pound US Dollar (GBP/USD) exchange rate traded erratically last week as expectations for both the Bank of England (BoE) and the Federal Reserve wavered. Forward guidance from policymakers on both sides gave mixed indications of what will happen next, leading to speculation among investors.
At the time of writing, GBP/USD is trading at $1.2444, having trended broadly lower over the weekly session.
Pound Fluctuates as Rate Hike Optimism Abounds then Wanes
Pound (GBP) gains were limited last week by variable sentiment regarding the Bank of England’s outlook ahead. A hawkish speech at the beginning of the week from the bank’s chief economist Huw Pill bolstered morale initially.
Pill told markets: ‘The Bank of England needs to guard against second-round inflationary effects which could see inflation bottom out at 4% or 5%, rather than return to its 2% target.’ His words were received as a suggestion that the BoE would continue to tighten its monetary policy.
Pound waned on Tuesday, however, as UK unemployment was revealed to have risen in March. Wage growth also slowed, limiting consumer spending potential and complicating interest rate expectations.
Furthermore, BoE governor Andrew Bailey gave dovish remarks at the British Chamber of Commerce annual conference, insisting that the impact of high interest rates is still making its way through the economy.
Thursday saw GBP make back some of its losses as treasury bond yields rose, but a lack of significant data on Friday reinforced headwinds, while the latest Gfk consumer confidence index printed as expected. The index does not usually have an impact on Pound exchange rates and Friday’s release was no exception. Nevertheless, GBP/USD rose slightly down to a weaker US Dollar (USD).
US Dollar (USD) Trends Broadly Higher
The US Dollar faced multiple headwinds last week as market mood fluctuated and interest rate hike bets were uncertain.
At the start of the week, markets were bullish in trading sentiment, sapping appeal for the safe-haven ‘Greenback’. Into Tuesday however, investor optimism faded and USD recouped some of its losses, further buoyed by a recovery in the retail sector – albeit smaller than anticipated. In the European afternoon, USD/GBP dropped.
Midweek, the exchange rate firmed once more as BoE headwinds subdued the Pound, but gains were capped for the US Dollar by concerns that the US government would be unable to raise the country’s debt ceiling and would subsequently default on its loan repayments.
Despite such worries, the ‘Greenback’ enjoyed support on Thursday as Federal Reserve policymakers hinted that monetary policy may need to be tightened further.
President of the Dallas Fed, Lorie Logan, remarked: ‘The data in coming weeks could yet show that it is appropriate to skip a meeting… As of today, though, we aren’t there yet.’ She added that the central bank hasn’t made sufficient progress on inflation.
On Friday afternoon, USD tailwinds were dialled back and the US Dollar fell, as Fed chairman Jerome Powell revealed that jitters in the US banking sector have led to tightening credit conditions, potentially reducing the need for further interest rate hikes. Contradicting forward guidance from Fed officials invariably dampens ‘Greenback’ morale.
GBP/USD Exchange Rate: Do Mixed Forecasts Signify Another Choppy Week?
Various data releases this coming week may inspire GBP/USD volatility. Multiple Fed speeches on Monday may direct initial movement, followed by manufacturing and services data on Tuesday; if both the UK and the US experience a mix of growth and activity slowdown, as expected, the exchange rate could waver.
If UK inflation falls midweek as forecast, GBP/USD might soften. Dovish comments as per the latest FOMC minutes could weigh upon the US Dollar in the European evening though, triggering an uptick.
At the end of the week, USD is likely to tumble if the PCE price index remains unchanged on last month as predicted. Meanwhile, growth in UK retail sales may boost the Pound.