The Pound US Dollar (GBP/USD) exchange rate sank last week, as investors pared bets on further tightening from the Bank of England (BoE).
What’s Been Happening: Pound Blighted by Pared Back BoE Hike Bets
The Pound (GBP) started strongly last week, as an upbeat market mood served to elevate the increasingly risk-sensitive currency.
However, confirmation of a contraction in the UK service sector pressured GBP rates on Tuesday. Additionally, a souring market mood also dragged on Sterling.
Following market closures for Labor Day on Monday, the US Dollar (USD) began to rise as downbeat Chinese data rattled investors.
The ‘Greenback’ then surged, following a surprisingly strong ISM services PMI reading. The surprising strong expansion in the sector raised bets for additional tightening from the Federal Reserve.
This was compounded by a surprise drop in initial jobless claims, indicating continued constraint in the US labour market.
Meanwhile, Sterling began to falter on the back of dovish remarks from Bank of England (BoE) Governor Andrew Bailey. He indicated that the bank is ‘much nearer to the top of the cycle’, leading to a paring of hike bets.
This led Sterling to end the week poorly, as investors now anticipate only one final rate hike from the BoE at their September meeting.
The ‘Greenback’, in contrast, ended the week on a high, amid a souring market mood.
Three Things to Watch Out for This Week:
- UK Wage Growth
On Tuesday, the latest UK wage growth data is set to print. Economists anticipate another record increase, which could revive BoE rate hike bets and lift the Pound.
- UK GDP
This is followed on Wednesday by July’s UK GDP data, wherein a 0.2% contraction is forecast. This may weigh heavily on GBP if it stokes recession fears.
- US Inflation
Wednesday brings the release of the latest US consumer price index. Will an acceleration in inflation last month further underpin Fed rate hike bets and stoke demand for the US Dollar?
The GBP/USD exchange rate is also expected to remain highly sensitive to market risk sentiment over the coming week. If the mood improves the pairing could strengthen.