The Pound US Dollar (GBP/USD) exchange rate strode to a 14-month high last week, as bets on further rate hikes from the Bank of England (BoE) soared.
What’s Been Happening: Hawkish BoE Bets Boosts GBP
Throughout last week, bets on further interest rate hikes from the BoE propelled the Pound (GBP) broadly higher, with markets eyeing up to 132bps in further tightening.
On Tuesday, following a drop in unemployment and a sharp increase in wage growth, these bets began to climb further.
This was then compounded by a 0.2% expansion in the UK economy over April. Economic resilience spurred on investors’ bets, carrying GBP’s momentum through Friday.
Meanwhile, the US Dollar (USD) started the week on a flat note amid a lack of data. Tuesday began a weeklong rout as headline inflation missed forecasts, which weighed on the ‘Greenback’.
Midweek, the Fed paused their current tightening cycle. While the door was left open for a resumption, the US Dollar was left on the defensive.
This was then compounded by a rise in initial jobless claims on Thursday, which offset gains made from stronger-than-expected retail sales.
Three Things to Watch Out for This Week
- BoE Interest Rate Decision
On Thursday, the BoE are expected to hike rates by another 25bps and maintain a hawkish outlook for inflation. This is likely to propel GBP higher.
- Fed Chair Powell Testimony
Fed Chair Jerome Powell is testifying to the US Senate this week, to outline and explain the Fed’s monetary policy. Any hawkish hints could strengthen USD.
- UK Inflation
The latest batch of UK inflation data is due to print on Wednesday, setting the stage for the BoE’s hike. Another robust reading could reinforce BoE rate hike bets.
GBP/USD Outlook
On Friday, the latest UK retail sales data is due to print. If this prints in line with forecasts of 0.2% decline, it may weigh on Sterling. However, it may not cause GBP to lose much ground following the BoE’s decision on Thursday.