Pound US Dollar (GBP/USD) Exchange Rate Roars Higher on BoE-Fed Divergence
(Updated 16:30, 14/12/23) The Pound US Dollar (GBP/USD) exchange rate surged to a three-month high today after the Bank of England (BoE) struck a notably hawkish tone at its latest interest rate decision.
While the bank held rates steady, as expected, three of the nine rate-setters voted for a hike. The bank said the decision between holding or hiking was ‘finely balanced’.
The BoE also took a markedly hawkish stance in its accompanying policy statement and the subsequent press conference. BoE Governor Andrew Bailey pushed back strongly against rate cut speculation, and even indicated that another rate hike was on the table.
This was in sharp contrast to the Federal Reserve decision on Wednesday evening, where a dovish tone from Fed Chair Jerome Powell sent the US Dollar (USD) spiralling.
With the BoE and Fed seemingly diverging on monetary policy, the GBP/USD exchange rate soared to its highest level since late August.
At the time of writing, the Pound US Dollar pair is trading at $1.2766. This is up a huge 1.2% on the day.
Attention now turns to the preliminary PMI results for December. Should UK service activity show further signs of recovery, GBP/USD could hit new highs.
Original article continues below:
Pound US Dollar (GBP/USD) Exchange Rate Holds Strong after Dovish Fed Comments
The Pound US Dollar (GBP/USD) exchange rate is currently trading at a ten-day high, after the Federal Reserve’s interest rate decision last night prompted a selloff in the US Dollar (USD). The Bank of England (BoE) decision is now in focus, with the potential to push the Pound (GBP) even higher.
At the time of writing, GBP/USD is trading at $1.2657, up 0.3% on the day and 1% higher than it was before the Fed meeting yesterday evening.
US Dollar (USD) Weak in Wake of Fed Decision
The US Dollar is on the back foot this morning after the Federal Reserve opened the door to hefty interest rate cuts.
At the US central bank’s final policy decision of 2023, the Fed left rates unchanged but strongly signalled that it will begin unwinding its tightening cycle next year.
The news sent USD exchange rates tumbling as much as 1% against many of its rivals. Hopes for easing global borrowing costs in 2024 also cheered markets, with a risk-on mood further undermining the safe-haven ’Greenback’.
Today, the US Dollar is licking its wounds.
Pound (GBP) Buoyed by Cheery Mood
Meanwhile, the cheery mood in markets is lending the increasingly risk-sensitive Pound some support. However, movement in GBP may be limited ahead of the Bank of England interest rate decision at noon.
While many analysts expect the BoE to push back on rate cut speculation, yesterday’s dire GDP data and the Fed’s surprisingly dovish tone have created some uncertainty.
As a result, GBP investors are trying not to get too carried away as they await the BoE’s policy announcement.
GBP/USD Exchange Rate Forecast: BoE Decision to Boost Sterling?
Looking ahead, the BoE decision is in the spotlight today.
As mentioned, the broad expectation is that the BoE will try to dampen rate cut expectations. UK inflation is currently at 4.6%, more than double the BoE’s 2% target.
If the bank does suggest that market bets on rate cuts next year are too optimistic then we could potentially see the Pound push even higher against the US Dollar.
However, if the BoE sounds unconvincing or strikes an unexpectedly dovish tone then GBP/USD could slump. Although inflation remains high, yesterday’s GDP figures have raised the spectre of recession.
Could the UK’s worrying economic outlook jolt the BoE into taking a more dovish stance? Or will the British central bank hold its nerve and stick to its ‘higher for longer’ narrative? Investors will be poring over the BoE’s statement and the following press conference for hints about next year’s approach to policy.
Later in the afternoon, the US retail sales figures for November could impact the ‘Greenback’. Will a further decline in domestic sales add to USD’s woes?