Pound US Dollar (GBP/USD) Exchange Rate Approaches 6-Month Low

Pound US Dollar (GBP/USD) Exchange Rate Crashes on Central Bank Decision Week

The Pound US Dollar (GBP/USD) exchange rate hit its lowest point in almost 6 months as last week’s trading session drew to a close. Weighing on the Pound (GBP) was the Bank of England (BoE)’s dovish pivot in deciding not to hike interest rates; meanwhile, the US Dollar (USD) benefitted from the Federal Reserve’s hawkish rhetoric.

At the time of writing, GBP/USD is trading at $1.2239, having fallen by over a full percentage point through the course of the week.

Pound (GBP) Depressed by BoE’s Interest Rate Pause

The Pound slumped across multiple exchange rates last week as Sterling investors digested the Bank of England’s decision to keep interest rates on hold.

GBP/USD traded broadly sideways ahead of the decision, though dipped midweek on a disappointing inflation release. Headline inflation fell to 6.7% for the month of August rather than increasing to 7% as forecast while core inflation fell 0.6% short of expectations.

The data indicated to investors that the BoE may favour a more dovish approach; yet markets still responded bearishly to the outcome. Complicating expectations may have been mixed comments from BoE policymakers in the lead up to the event.

In the accompanying statement, the bank acknowledged that high inflation remained problematic, but defended its decision: ‘There are increasing signs of some impact of tighter monetary policy on the labour market and on momentum in the real economy more generally.’

Four of the bank’s nine-strong Monetary Policy Committee (MPC) voted to hike once more, making it a very close call. Discord over the BoE’s onward trajectory continues to inspire GBP volatility, along with downwardly revised economic growth forecasts: the MPC cut its GDP prediction for the July-September period to just 0.1% from August’s 0.4% forecast.

US Dollar (USD) Enjoys Fed-Inspired Boost

While the Pound weakened following the BoE’s interest rate decision, the US Dollar enjoyed tailwinds as the Federal Reserve struck a hawkish tone in its latest policy statement.

The Fed kept interest rates on hold, mirroring the decisions of other major central banks: Sarah House, senior economist at Wells Fargo, noted: ‘The Fed is going through the same challenges other central banks are in terms of fine-tuning policy.’

Yet instead of focusing on the need for caution, Fed officials were optimistic on Wednesday. Commenting on the bank’s decision, they expressed confidence that the Federal Reserve will be able to bring inflation under control without triggering an economic downturn.

‘Recent indicators suggest that economic activity has been expanding at a solid pace,’ the latest statement read; ‘Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low.’

Acknowledging that inflation is still above target, bank officials signalled the likelihood of one more interest rate hike by the end of the year. This prospect helped to keep USD sentiment upbeat: following a brief downward hiccup, the ‘Greenback’ closed the week with impressive gains against the Pound.

GBP/USD Exchange Rate Forecast: Fresh Data in Focus

Looking ahead, this coming week brings a series of new releases including UK distributive trades, US house price data and Fed speeches, durable goods orders, finalised GDP data and on Friday, the US PCE price index – the Fed’s preferred measure of inflation.

GDP may be one to watch – stronger than expected UK growth could help buoy the Pound. Friday’s inflation reading is likely to be the main event though. If the index remains unchanged as expected, investors may be led to contemplate the necessity of another interest rate hike from the Fed.

Elsewhere, external factors including risk sentiment and global economic performance could sway GBP/USD. Moreover, GBP investors may be inclined to reposition following a dismal week for the Pound.

Olivia Evershed

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