Pound US Dollar (GBP/USD) Exchange Rate Narrows as BoE Leaves Door Open for Further Hikes
Article updated 08:42, 4/8/23:
The Pound US Dollar (GBP/USD) exchange rate is wavering this morning, following an overnight rally.
While an improvement in the market mood is contributing to this recovery, the predominant reason is that Bank of England (BoE) Governor Andrew Bailey left the door open for further hikes.
Because of this, and the lingering inflationary pressures in the UK, investors moved to support Sterling.
At the time of writing, GBP/USD is trading around US$1.2713, showing little movement from the morning’s opening rates.
Pound US Dollar (GBP/USD) Exchange Rate Flat as Markets Digest BoE Hike
Article updated 16:43, 3/8/23:
The Pound US Dollar (GBP/USD) exchange rate is remaining trapped in narrow boundaries this afternoon, as markets pore over the Bank of England’s (BoE) interest rate decision.
The BoE hiked rates by the expected 25bps, but took what was initially perceived as a dovish angle in the accompanying guidance.
Hikes will now be more moderately paced, after the 14th consecutive raise by the bank. Furthermore, the BoE appears to be shifting towards keeping rates higher for longer as opposed to further increases.
Philip Shaw, an Economist at Investec, comments:
‘The level of the Bank rate is now at a 15½ year high and, as the BoE points out, the stance of policy is undoubtedly restrictive.
Unless labour market pressures turn out to be considerably more durable than we believe them to be, further spare capacity should be opened up in due course and we should be close to the terminal level of the Bank rate.’
With rates now close to, or at, the terminal peak, Sterling seems to have little left in the tank today.
At the time of writing, GBP/USD is trading at around US$1.2716, showing little movement from the morning’s opening rate. However, GBP/USD has seen volatility throughout the European session, and fell below the $1.26 mark.
Original article continues below:
Pound US Dollar (GBP/USD) Exchange Rate Narrows amid Muted US Data
Article updated 15:41, 3/8/23:
The Pound US Dollar (GBP/USD) exchange rate has recovered most of its losses this afternoon, but is narrow overall.
The Pound saw sharp losses following the Bank of England’s (BoE) dovish 25bps hike, but has managed to lick its wounds.
The US Dollar is coming under pressure following the publication of the latest ISM services PMI. While still in expansion territory, the vital sector was found to have slowed more than expected in July.
The reading printed at 52.7, below expectations of 53 and down from 53.9.
Anthony Nieves, Chair of the ISM, commented:
‘There has been a slight pullback in the rate of growth for the services sector. This is due mostly to the decrease in the rate of growth for business activity, new orders and employment, as well as ongoing faster delivery times. The majority of respondents are cautiously optimistic about business conditions and the overall economy.’
However, a slight increase of the number of jobless claims may be further weighing on the ‘Greenback’. The number of unemployed people in the US increased by 227,000 in the past week.
At the time of writing, GBP/USD is trading at around US$1.2712, coming back to around the morning’s opening rates.
Pound US Dollar Exchange Rate Stumbles Ahead of BoE Rate Decision
The Pound US Dollar exchange rate is weakening this morning, as investors anticipate the Bank of England’s (BoE) interest rate decision.
At the time of writing, GBP/USD is trading at around US$1.2676, falling by over 0.3% from the morning’s opening rates.
Pound (GBP) Quiet Ahead of BoE Decision
With the main event still to come, the Pound (GBP) is trading quietly thus far this morning. Investors are waiting for the Bank of England (BoE) to deliver their latest interest rate decision at noon.
Markets have priced in a 25bps hike, and have dismissed the possibility of another bumper 50bps hike. Because of this, the attention will be on any accompanying forward guidance. If the door is left clearly open for further rate hikes, Sterling will likely gain ground this afternoon.
However, the decision is unlikely to be a simple one. The BoE are functionally stuck between a rock and a hard place. The UK economy is currently on a knife-edge, and further tightening could push it into recession.
US Dollar (USD) Firms amid Sour Market Mood
The US Dollar (USD) is firming this morning, as the sombre market mood brings safe-haven flows to the ‘Greenback’.
However, as the predominant cause of the downbeat mood comes from yesterday’s Fitch downgrade, any gains are limited.
The rating agency downgraded the US government’s credit rating to AA+ from AAA, citing concerns over fiscal responsibility.
Analysts are anticipating that the move will remain a thorn in the ‘Greenback’s side for some time. Chris Turner, at ING, comments:
‘Despite the Democrat administration and its supporters in the media decrying Fitch’s decision to remove the sovereign’s AAA status on Tuesday evening, there is genuine concern over US fiscal dynamics. And it looks like the Fitch release was carefully timed.’
Elsewhere, focus is likely shifting towards data releases due this afternoon. Initial jobless claims data will likely be of keen interest, following upbeat signals from previous labour market data.
GBP/USD Exchange Rate Forecast: US Data in Focus
Later this afternoon, the latest ISM services PMI is scheduled for publication. Economists have forecast a slight decline in sector activity, falling from 53.9 to 53. If this prints accurately, USD could weaken modestly.
Further ahead, Friday brings the releases of the latest non farm payrolls figures and July’s unemployment rate.
Following yesterday’s surprise ADP employment print, the NFP data could surprise markets. If it prints above forecasts, USD would likely rally as a soft landing for the US economy seems ever likelier.
Similarly, if the unemployment rate holds at 3.6% as forecast, further strength may come to the ‘Greenback’.
Tomorrow, continued analysis and reaction to the BoE’s interest rate decision is likely to be the main driver for GBP.
Markets could move to support Sterling if further hikes seem likely, yet a shift to bearish trade could temper these gains.