Pound US Dollar (GBP/USD) Exchange Rate Recovers as Markets Bet on BoE Hikes
(Updated 17:00, 09/06/23) The Pound US Dollar (GBP/USD) exchange rate recovered this afternoon, rising to a fresh one-month high, amid expectations of more Bank of England (BoE) interest rate rises.
The Pound (GBP) had initially retreated, suffering from some profit-taking and downbeat headlines around the UK economy.
However, the likelihood of multiple further interest rate hikes from the BoE helped Sterling to bounce back.
Markets expect the British central bank to raise rates at least twice more, while forecasting a policy pause from the Federal Reserve next week.
This expected policy divergence boosted GBP/USD to a new one-month high of $1.2590. At the time of writing, the pair is at $1.2576.
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Pound US Dollar (GBP/USD) Exchange Rate Stumbles amid UK Worries
The Pound US Dollar (GBP/USD) exchange rate briefly touched a one-month high this morning but is currently weakening due to a bout of profit-taking and concerns about the UK economy.
At the time of writing, GBP/USD is trading at $1.2538, down 0.2% on the day.
Pound (GBP) Softens amid Economic Warnings
After rising to a one-month high against the US Dollar (USD) as the European session got underway, the Pound (GBP) then began to decline.
One factor behind the downside was profit-taking. Some investors sought to cash-in on Sterling’s impressive rally against the ‘Greenback’.
However, UK economic concerns could also be playing a part. New data from the business advisory firm BDO showed that sales declined by 1.5% in May, turning negative for the first time in over two years.
Sophie Michael, Head of Retail and Wholesale at BDO, called the results ‘extremely discouraging’. Michael said:
‘With three bank holidays last month and the fact that footfall has increased compared to this time last year, these results highlight the huge pressure on the consumer purse.
‘The drop in online sales is also stark, recording the worst online sales results on record with the exception of the months impacted by the Covid-19 pandemic.’
Furthermore, worries about falling UK house prices could be troubling GBP investors. Large bank HSBC has pulled new mortgage deals amid expectations that the Bank of England (BoE) will continue raising rates. Chaos in the mortgage market has exacerbated fears of a housing price downturn, which could have wider implications for the UK economy.
US Dollar (USD) Limited by Dovish Fed Bets
Meanwhile, the US Dollar is struggling to press the advantage as it faces headwinds of its own.
Investors are betting that the Federal Reserve will leave interest rates on hold at its upcoming meeting, which is weighing on USD. Market odds for a 25bps hike at the Fed’s meeting next week are currently at 25%, down from over 30% earlier in the week.
However, US Treasury bond yields – which often indicate Fed bets and support USD – are attempting a recovery this morning, after falling sharply yesterday. This may be underpinning the US Dollar.
GBP/USD Exchange Rate Forecast: Muted Movement amid Lack of Data?
Looking ahead, both UK and US data is in short supply through to the end of the week. As a result, GBP/USD movement may be limited and unpredictable.
A key factor driving the currency pair will be market risk sentiment. Currently, the market mood seems cautiously optimistic, which could come to favour the riskier Pound over the safe-haven US Dollar as the day progresses. Any shifts to a more decidedly risk-on or -off tone could support or soften the Pound Dollar pair, respectively.
In addition, interest rate rise bets could affect the currency pairing. Speculation around further BoE rate hikes could support GBP, while expectations of a Fed policy pause could pressure USD.