The Pound US Dollar (GBP/USD) exchange rate strengthened last week, as investors bet on further tightening from the Bank of England (BoE).
What’s Been Happening: Rate Hike Bets Boost Pound
The Pound (GBP) strengthened last week, following on from a slow start courtesy of a bank holiday.
In the wake of the previous week’s shock jump in UK inflation, GBP investors appeared to double down on further interest rate hike bets from the BoE.
Sterling surged as markets bet rates would rise as high as 5.5% by the end of the year.
Sterling’s increasingly risk-sensitive nature further underpinned it in mid-week trade, following the passing of a US debt ceiling deal. Risk appetite increased as fears of global slowdown began to recede.
However, repricing struck Sterling on Thursday and Friday. A shift in risk appetite prompted GBP to fall from a 3-week high against the ‘Greenback’.
Meanwhile, the US Dollar (USD) was blighted by the one-two punch of cheery trade and diminished Federal Reserve rate hike bets.
Dovish sentiments from the Fed indicated a shift towards a pause this month. However the US Dollar still ended the week on a high after the latest US payroll figures smashed expectations.
Three Things to Watch Out for This Week
- BoE Rate Hike Bets
Rate hike bets are likely to remain elevated in the UK this week. Could this help to sustain some of the Pound’s recent gains?
- US ISM Services PMI
Printing this afternoon, the ISM service sector index is forecast to report an increase in May, which could lift USD.
- Risk Appetite
Market mood is likely to be a key driver for GBP/USD over the week. If risk appetite increases, GBP could strengthen.
GBP/USD Outlook
Elsewhere, the latest initial jobless claims could provide direction for the US Dollar. On Thursday, these are forecast to edge higher, but remain in their usual bounds. This could strengthen USD by indicating a tight labour market, prompting further Fed hike bets.