Pound US Dollar (GBP/USD) Exchange Rate Narrows Despite Dwindling BoE Bets

Pound US Dollar (GBP/USD) Exchange Rate Flattens as Market Mood Improves

Article updated 16:05, 20/9/23:

The Pound US Dollar (GBP/USD) exchange rate has clawed back some ground this afternoon, as risk appetite returns across the markets.

As an increasingly risk-sensitive currency, Sterling has been able to recover a little against the safe-haven ‘Greenback’.

However, GBP has been unable to reverse its losses as investors have continued to recalibrate their bets on further tightening from the Bank of England (BoE).

Thinking has grown that the BoE may even opt to pause their tightening cycle tomorrow after this morning’s surprise inflation data. However, the consensus remains of a 25bps hike tomorrow, albeit a dovish one.

At the time of writing, GBP/USD is trading at around US$1.2397, showing little deviation from the morning’s opening rates.

Original article continues below:

Pound US Dollar (GBP/USD) Exchange Rate Hits Three-Month Low amid Shock UK Inflation Cooldown

The Pound US Dollar (GBP/USD) exchange rate struck a three-month low this morning, following a surprise cooldown in UK inflation.

At the time of writing, GBP/USD is trading at around US$1.2365, falling by just over 0.2% from the morning’s opening rates.

Pound (GBP) Slides as CPI Cools

The Pound (GBP) is sliding this morning, following a shock cool in headline and core inflation. August’s data printed below expectations, cooling from 6.8% to 6.7%.

Core inflation fell even further, decelerating from 6.9% to 6.2%. This showed a clear downward trend in the UK consumer price index, and prompted a significant adjustment in Bank of England (BoE) rate hike bets.

Kallum Pickering, Senior Economist at Berenberg Bank, commented:

‘This will be welcome news for policymakers at the Bank of England (BoE) as they deliberate this week whether or not to further raise the bank rate from 5.25% in order to add even more downward pressure to domestic demand and thus prices. The BoE decision will be announced at 12:00 (BST) tomorrow.

The market for overnight index swaps (OIS), which had dramatically cut its bets for the peak bank rate in recent weeks (from a high of 6.5% in early July – which we had pushed back against), has now lowered its bet on a further final 25bp hike to a c50% chance from a virtually certainty yesterday.’

With the consensus having further shifted to land on a pause at tomorrow’s meeting, Sterling is enduring additional pressure.

US Dollar (USD) Calm Ahead of Fed Decision

The US Dollar (USD) is in the calm before the storm this morning, as investors focus on tonight’s interest rate decision from the Federal Reserve.

Markets are anticipating a pause from the Fed at tonight’s decision, but with the door left open for a future hike. Similarly, analysts expect no talk of rate cuts until at least 2024.

However, this may do very little for the US Dollar as any movements have been pencilled in by markets for some time.

Francesco Pesole, FX Strategist at ING, commented:

‘We expect the statement to be changed only marginally, keeping a reference to ongoing rate increases that “may be appropriate” and Fed Chair Jerome Powell willing to keep all options open at the press conference.’

Pound US Dollar Exchange Rate Forecast: UK Retail Recovery to Buoy Sterling?

Looking ahead for the Pound, beyond tomorrow’s decision, Friday brings the release of the latest UK retail sales data.

Economists anticipate sales to have increased by 0.5% in August, which would reflect a significant recovery. If this prints in line with forecasts, Sterling could rally amid signs of steady consumer spending.

However, if the release trends in line with previous prints, it may surprise to the downside and weaken Sterling.

For the US Dollar, data releases are relatively scarce through to the end of the week. As such, the ‘Greenback’ is likely to trade on the fallout from tonight’s Fed decision.

Additionally, risk appetite is likely to be a key driver of movement for the pairing. A shift to bearish trade could boost GBP/USD.

John Mulcahey

Contact John Mulcahey

Do Not Sell My Personal Information