Pound US Dollar (GBP/USD) Exchange Rate Fluctuates on Recession Fears
(UPDATED 22/6/23, 16:45)
The Pound US Dollar (GBP/USD) exchange rate is weakening modestly this afternoon despite the hawkish hike from the Bank of England (BoE). Mounting fears of economic growth due to escalating price pressures could be denting investor confidence.
Meanwhile, higher-than-expected initial jobless claims in the US could be offsetting the Pound’s relative weakness. Against expectations of an increase of 260k, the number of Americans filing for unemployment grew by 260k. Further signs of the labour market cooling could pare rate hike expectations from the Federal Reserve.
At time of writing the GBP/USD exchange rate is trading around $1.2752, still relatively unchanged from this morning’s opening levels.
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Pound US Dollar (GBP/USD) Exchange Rate Wavers as BoE Interest Rate Hits 5%
(UPDATED 22/6/23, 12:15)
The Pound US Dollar exchange rate continues to trade narrowly despite the BoE opting to deliver an aggressive 50bps rate hike. With the markets split over a 25 or 50bps rate hike, the central bank decided to take the interest rate to a 15-year high of 5%.
However, with the cloud of recession looming ever closer, GBP investors could be more concerned with the state of the UK economy rather than the aggressive tightening cycle.
At time of writing the GBP/USD exchange rate is trading around $1.2762, still relatively unchanged from this morning’s opening levels.
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GBP/USD Exchange Rate Fluctuates as Investors Brace for Interest Rate Decision
The Pound US Dollar exchange rate is trading narrowly as the BoE is expected to raise the interest rates for the 13th consecutive time.
At time of writing the GBP/USD exchange rate is trading around $1.2784, relatively unchanged from this morning’s opening levels.
Pound (GBP) Quiet ahead of Interest Rate Decision
The Pound (GBP) is fairly muted this morning as the markets brace for a 13th consecutive rate hike. After inflation came in hotter than expected yesterday, another interest rate rise is a near certainty.
The BoE is expected to raise interest rates by at least 25bps at midday today. However, some corners of the market are predicting that the central bank could deliver a chunky half-percent raise. This would bring the cash rate up to 5%, levels not seen since the financial crisis in April 2008.
With inflation proving sticky, and far above the target rate of 2%, the BoE is struggling to rein in inflation. The central bank could be left with little choice but to continue their aggressive rate hike cycle. Mike Riddell, Head of Macro Unconstrained at Allianz Global Investors, added:
‘Whilst headline inflation is flat vs last month, core inflation has accelerated even further. This leaves the Bank of England (BoE) with little choice other than to continue hiking rates, to weaken demand.
‘If problems on the supply side do not improve, then the BoE will be forced to further reduce demand to get wage growth lower. If it doesn’t, then the BoE may as well not have an inflation target.’
Despite the prospect of a bumper rate hike, the concerns of ever-soaring interest rates pushing the UK into a recession could be dampening the mood.
US Dollar (USD) Supported by Further Rate Hike Bets
Meanwhile, the US Dollar (USD) is clinging onto modest gains from rate hike expectations. Federal Reserve Chair Jerome Powell testified before Congress on the Fed’s monetary policy.
Powell reiterated comments that he made at the last policy meeting and said that it will be appropriate to resume raising interest rates ‘somewhat further’ by the end of the year. Powell also said that decisions will be data-dependant whilst balancing the risks. Economists at Rabobank commented on the Fed’s forward guidance, citing uncertainty that could be weighing on USD investors:
‘While we expect the Fed to hike in July, a more moderate pace would imply skipping September and that would leave us with November as the meeting for the second hike. However, even the Fed’s own staff expects the economy to be in a mild recession by then. Therefore, we continue to leave a second hike out of our forecasts.’
Pound US Dollar Forecast: Bold 50bps Rate Hike to Boost Sterling?
Looking ahead, the Pound US Dollar exchange rate could see further movement when the BoE announces its policy decision at midday. With a 13th straight hike all but priced in, the debate is now between a 25 or 50bps raise. However, the accompanying statement will be closely watched for further clues on forward guidance. A hawkish tone could provide the Pound a much-needed boost, but fears of a recession could keep a firm lid on substantial gains.
Meanwhile, the US Dollar could see fluctuations with the latest initial jobless claims data. An expected uptick of unemployment claims could weigh on the ‘Greenback’, amid recent signs indicate a somewhat cooling of the labour market. However, prospects of a return to raising interest rates could still keep the US Dollar afloat.