Pound US Dollar (GBP/USD) Exchange Rate Strong as Markets Reassess Rate Hike Bets
(Updated 09:40, 16/06/23) The Pound US Dollar (GBP/USD) exchange rate struck a fresh high this morning, rising to $1.2817 – its highest level since late April. The upside came as markets bet on more Bank of England (BoE) interest rate hikes while reining in expectations for the Federal Reserve.
Although the Fed signalled that it would raise rates again, after leaving them unchanged on Wednesday evening, yesterday’s jobless claims dampened Fed bets.
Meanwhile, recent data has cemented expectations that the BoE will press ahead with more interest rate rises, as inflation remains worryingly high.
Furthermore, next week’s meeting will be the last decision for policymaker Silvana Tenreyro. Tenreyro is one of the most dovish members of the bank’s Monetary Policy Committee (MPC), and will be replaced by the much more hawkish Megan Greene. This increases the likelihood of more hikes in the future.
The policy divergence between the Fed and the BoE has seen GBP/USD soar in recent days, with the pair striking a 14-month high this morning.
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Pound US Dollar (GBP/USD) Exchange Rate Surges Higher amid Central Bank Divergence
(Updated 15:25, 15/06/23) The Pound US Dollar (GBP/USD) exchange rate soared this afternoon, hitting its highest levels since late April, as central bank policy divergence weighs on the American currency.
The US Dollar (USD) initially softened this morning, trimming the gains made after the Federal Reserve interest rate decision. While the Fed left rates unchanged, it hinted at more hikes to come, which in turn boosted USD.
However, following the European Central Bank (ECB) interest rate decision, the Fed’s move looks dovish. The ECB hiked rates by 25bps, signalling another increase in July and potentially more to follow.
Meanwhile, markets expect the Bank of England (BoE) to also press ahead with more policy tightening. There is even the outside chance of a 50bps rise at the BoE’s meeting next week.
Furthermore, US jobless claims exceeded forecasts this afternoon. Signs of a cooling labour market take more pressure off the Fed to keep raising rates.
US jobless claims steady last week after recent runup. Although new filings for unemployment benefits have jumped lately the numbers remain low and so it's still debatable if this is a sign of deteriorating labor market conditions: pic.twitter.com/9kOKGY7FpN
— James Picerno (@jpicerno) June 15, 2023
Markets now seem to be repricing the US Dollar against the Pound (GBP) and the Euro (EUR) based on central bank expectations. Policy divergence between the Fed and the BoE has seen GBP/USD shoot higher.
At the time of writing, GBP/USD is trading at around $1.2733, up 0ver 0.5% on the day and having hit a one-year high of $1.2738.
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Pound US Dollar (GBP/USD) Exchange Rate Rises amid BoE Bets
The Pound US Dollar (GBP/USD) exchange rate is inching higher today, regaining ground lost overnight after the Federal Reserve’s hawkish pause.
At the time of writing, GBP/USD is trading at around $1.2658, up around 0.2% from its overnight lows.
US Dollar (USD) Fluctuates in Wake of Fed Decision
The US Dollar (USD) stumbled at the start of today’s session, retracing its steps overnight after the Fed decision.
Having hit a one-year low against the Pound (GBP) yesterday, USD then managed to rebound in the wake of the Fed’s interest rate decision. The US central bank left rates unchanged, as expected, but signalled that it would hike again in the months ahead.
In addition, the Fed revised up its projected terminal rate from 5.1% in March to 5.6%.
USD/GBP recouped some of yesterday’s losses following the Fed announcement, but today it is slipping lower again.
However, a risk-off mood may be cushioning the safe-haven US Dollar. Markets are cautious today, with the prospect of rising borrowing costs troubling investors. This could help the US recoup some losses as the session unfolds.
Pound (GBP) Supported by BoE Speculation
Meanwhile, the Pound is strengthening today as markets continue to bet on ongoing interest rate hikes from the Bank of England (BoE).
This week, hotter-than-forecast jobs data and a recovery in UK GDP have elevated expectations that the BoE will continue to take aggressive action to bring inflation down.
Jeremy Hunt, the UK Chancellor, yesterday said that the BoE must keep raising interest rates. Today, his advisor and former BoE policymaker Sushil Wadhwani echoed this sentiment.
‘Inflation untimely is the enemy of growth. It’s very important for us to get inflation down if you want sustainable growth.
‘In that sense it’s important to continue administering the medicine, in the form of higher interest rates, notwithstanding the side-effects, because if we delay raising rates then we might find the disease gets worse and we might then find that we have to do even more and experience even worse side effects’
A sign of rising interest rate bets, UK government bond yields are climbing today, reapproaching their highest levels since the chaos in bond markets following Liz Truss and Kwasi Kwarteng’s mini-budget. BoE bets are boosting the Pound.
GBP/USD Exchange Rate Forecast: US Sales to Dent the Dollar?
Looking ahead, US retail sales this afternoon could dent the ‘Greenback’, providing GBP/USD with further support. Economists expect domestic American sales to have contracted last month.
USD investors will also be keeping an eye on the latest initial jobless claims figures. Last week, jobless claims jumped by their largest amount since October 2021. If new claims remain high this week, signs of slack in the US labour market could dampen Fed bets and thereby dent the US Dollar.
Market risk appetite could also impact the Pound US Dollar pair. A downbeat mood could start to weigh on the riskier UK currency versus the safe-haven ‘Greenback’.