Pound US Dollar (GBP/USD) Exchange Rate Tumbles on 50bps Rate Hike
The Pound US Dollar (GBP/USD) exchange rate fell by approximately half a percentage point last week as the Bank of England (BoE) delivered a greater-than-expected interest rate hike, triggering concerns of a UK recession. Meanwhile, the chairman of the US Federal Reserve, Jerome Powell, struck a hawkish tone in his testimony to the Senate – which helped boost the US Dollar (USD).
At the time of writing, GBP/USD is trading at $1.2713, ultimately falling to its lowest point in over a week.
Pound (GBP) Pressured by Controversial BoE Mega-Hike
The Pound (GBP) traded with volatility last week as the Bank of England’s interest rate decision defined currency dynamics. Leading up to the event, a lack of major data left GBP investors trading on tenterhooks; subsequently, fears of a recession kept Sterling subdued.
On Monday, GBP managed to inch higher against perceived riskier currencies, but sank against the ‘Greenback’ as risk sentiment deteriorated. The following day, the decline in the Pound US Dollar exchange rate was more pronounced amid building USD strength; sustained bets for a BoE rate hike failed to boost Sterling morale.
Midweek, the UK’s annualised inflation rate printed at 8.7% rather than the 8.4% forecast – but with an interest rate hike already expected, the news inspired headwinds rather than buoying GBP. Fears over the effects of prolonged borrowing costs proliferated.
On Thursday, the BoE surprised investors by hiking interest rates by double the amount predicted. Luke Bartholomew, Senior Economist at global investment firm ABRDN, said:
‘It is increasingly difficult to see how the UK avoids a recession as part of the process of bringing inflation down… today’s large rate increase will probably be seen in retrospect as an important milestone towards that recession.’
On Friday, GBP/USD hit an 8-day low, despite an initial boost from better-than-expected retail data. Downbeat PMI data and a bearish market mood weighed upon investors’ confidence after a volatile week.
US Dollar (USD) Supported by Bearish Trading Sentiment
The US Dollar trended up against the Pound and several other of its peers last week, bolstered by a combination of hawkish Fedspeak and risk-off tailwinds.
Central bank optimism supported USD on Monday as several Fed officials expressed the likelihood of hiking interest rates at the bank’s July meeting; moreover, June’s US NAHB Housing Market Index improved from 50 to 55.
The ‘Greenback’ relinquished some of its gains overnight, but recovered on Tuesday as a bearish market mood prevailed. The uptick in ‘Greenback’ exchange rates was further fuelled by additional hawkish comments from the Fed.
The US Dollar was pressured overnight but subsequently enjoyed another boost midweek: comments from Fed chairman Powell then reversed the majority of the morning’s gains. The head of the central bank was vague in his forward guidance, disappointing investors initially – but subsequently gave traders a degree of hope with his observation:
‘Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year.’
On Thursday, initial jobless claims in the US exceeded expectations, sparking some volatility in US Dollar exchange rates. As bearish sentiment returned, however, USD losses were capped by the currency’s safe-haven appeal.
‘Greenback’ gains extended into Friday, as fears over the state of the global economy continued to support risk-off sentiment. Amid persistent inflation and rising interest rates, concern amongst investors, politicians and the public is rising.
GBP/USD Exchange Rate Forecast: Fed Policy Divergence to Narrow?
Into this week, GBP/USD is likely to trade on central bank dynamics, given a scarcity of key economic data.
Fed Chairman Powell and several other Fed speakers are due to talk, which could boost the ‘Greenback’ if a hawkish tone is struck. Meanwhile, BoE speakers Huw Pill and Silvana Tenreyro will also speak, potentially triggering movement in Pound exchange rates.
On Friday, the US PCE price index may shape US monetary policy forecasts: if the Fed’s preferred measure of inflation fell as expected in the year to May, the central bank may be less likely to hike interest rates in July, which could in turn weigh upon the US Dollar.