Pound US Dollar (GBP/USD) Exchange Rate Skyrockets as Fed Hold Interest Rates
The Pound US Dollar (GBP/USD) exchange rate rose by approximately 2% last week as central bank policy divergence crushed US Dollar (USD) morale. Meanwhile, upbeat employment data and economic growth supported the Pound (GBP).
At the time of writing, GBP/USD is trading at $1.2819, having peaked at the end of last week at a 14-month high.
US Dollar (USD) Dented as Fed Keeps Interest Rates on Hold
The US Dollar succumbed to headwinds last week despite the fact that June’s interest rate pause was widely anticipated.
The week started quiet, although the US government’s budget deficit printed above expectations which may have dampened ‘Greenback’ optimism. Into Tuesday, the currency experienced a definite blow as inflation in the States missed expectations.
The US Dollar subsequently enjoyed a brief uptrend midweek – persistent price pressures among core consumer goods may have inspired hopes of Federal Reserve hawkishness. Nevertheless, the
central bank’s failure to commit to an interest rate hike at its July meeting, in addition to keeping interest rates on hold in June, disappointed investors.
The Fed did indicate that an increase in interest rates would likely be necessary later down the line, although the effect of such hints was limited.
On Thursday, mixed US data prompted a USD downslide: while an increase in retail sales initially lent the currency some support, a rise in initial jobless claims and a decrease in industrial production overrode potential tailwinds.
The US Dollar downside lasted overnight and into Friday, despite an improvement in consumer sentiment.
Pound (GBP) Climbs on Data, BoE Optimism
The Pound firmed last week against the majority of its peers as economists continued to forecast a hawkish Bank of England (BoE). Upbeat data also provided the currency with a boost despite some caution about the possibility of a UK recession.
At the start of the week, GBP/USD stalled amid a lack of UK data, although hawkish comments from BoE external policymaker Jonathan Haskel lent some support to GBP.
On Tuesday, the exchange rate climbed as a drop in the UK’s April unemployment rate cheered Sterling investors. Additionally, the British economy added more jobs than expected in March and employers increased wages – signalling a strong labour market while indicating that inflationary pressures remained.
Tailwinds extended into Wednesday’s session as UK GDP data met expectations, recording economic growth of 0.2% in April. Nevertheless, traders were preoccupied with US central bank developments in the evening and the Pound US Dollar exchange rate softened overnight.
On Thursday, Sterling resumed its uptrend as a speech by Mark Carney, former governor of the Bank of England, inspired confidence:
‘One of the things that governments in the UK, and Canada, elsewhere have to get used to, now, is that they are going to be paying higher rates of interest for their debt for the foreseeable future,’ said Carney, reinforcing expectations of tighter monetary policy.
At the end of the week, GBP/USD peaked at levels not visited since April 2022, with GBP investor confidence holding firm ahead of the upcoming BoE announcement.
GBP/USD Exchange Rate Forecast: Bank of England in Focus
Into this week, the Bank of England’s interest rate decision will take centre stage. GBP/USD may climb further if the BoE maintains its hawkish stance, although investors have already priced in multiple rate hikes this year.
Softer UK inflation may conversely prompt investors to moderate their bullish expectations – moreover, the Pound may be considered overbought.
Multiple speeches from Federal Reserve officials are scheduled in the US docket, potentially driving USD exchange rates. A more optimistic pivot from Fed chairman Jerome Powell could yet help the ‘Greenback’ to recover some of its losses.