Pound US Dollar (GBP/USD) Exchange Rate Drops on Bearish UK Sentiment
The Pound US Dollar (GBP/USD) exchange rate fell sharply this morning ahead of the Bank of England (BoE)’s interest rate decision. Following the central bank’s election to keep rates on hold at 5.25%, the Pound (GBP) continued to plummet on economic concerns.
At the time of writing, GBP/USD is trading at $1.2253, over 0.7% lower than this time yesterday.
Pound (GBP) Crashes to 5-Month Low
The Pound plummeted against its peers this morning ahead of the BoE’s rate decision. Sterling investors were split 50/50 over whether the bank would hike or not, given the UK’s latest inflation reading.
Headline inflation printed at 6.7% yesterday – marking a fall rather than the expected increase on the previous reading. Indications that price pressures are easing called expectations of a hike into question.
Following the BoE’s decision to keep interest rates unchanged at 5.25%, investors remain tense: despite dissipating fears of higher borrowing costs, the central bank’s decision is a reflection of the state the economy is in.
In its accompanying monetary policy statement, the Monetary Policy Committee (MPC) said: ‘There are increasing signs of some impact of tighter monetary policy on the labour market and on momentum in the real economy more generally.’
Moreover, the BoE remarked that growth for the rest of the year was likely to be weaker than previous forecasts. Inflation remains high – and while not increasing, interest rates are still elevated to levels not seen since the 2008 financial crisis.
The Bank of England’s Governor, Andrew Bailey, committed continuing the battle against inflation in a separate statement today, saying ‘there’s no room for complacency… We need to be sure inflation returns to normal and we will continue to take the decisions necessary to do just that.’
US Dollar (USD) Remains Strong in Wake of Fed Decision
The US Dollar (USD) has climbed against the Pound and several other peers today following yesterday’s decision from the Federal Reserve to keep interest rates on hold.
The outcome had been widely forecast – investors responded favourably to the bank’s decision and accompanying statement. An optimistic tone in policymakers’ commentary helped buoy USD sentiment, as the 19 members of the rate-setting committee conveyed optimism that inflation may be brought to its 2% target while avoiding a deep recession.
Further quieting bullish criticism, the Fed signalled that they expect to raise rates once more in 2023. Like the Bank of England, however, officials noted that interest rates would likely remain higher than expected into 2024.
Continuing to threaten economic growth in the US are rising fuel prices and ongoing price pressures in several service sectors including auto insurance, car repairs, veterinary services and hairdressing.
The difficulty for the US central bank is in balancing inflationary pressures against the risks of raising interest rates too high. Sarah House, senior economist at Wells Fargo, observes:
‘The Fed is going through the same challenges other central banks are in terms of fine-tuning policy… Increasingly the risks are shifting from inflation being the one and only focal point, to having to balance the inflation fight to make sure the Fed doesn’t do unnecessary damage.’
GBP/USD Exchange Rate Forecast: Pound Instability Predicted
Looking ahead, GBP/USD is likely to extend its rocky trajectory as Pound investors continue to digest the BoE’s interest rate decision.
Furthermore, this afternoon’s US data could influence the exchange rate. US Initial jobless claims have fallen below forecasts, lending additional support to the ‘Greenback’ – on the other hand, the Philadelphia Fed’s manufacturing index for September printed well below expectations.
UK retail data is expected to print at 0.5% tomorrow, which may lend a boost to Pound exchange rates; if sales increased in August, the release will be as a tonic to a currency under duress.