Pound US Dollar (GBP/USD) exchange rate flat as markets analyse central bank rate cuts
The Pound US Dollar (GBP/USD) exchange rate is narrowing this morning, as markets deliberate the central bank’s next steps.
At the time of writing, GBP/USD is trading at around US$1.2756, showing little movement from the morning’s opening rates.
Pound (GBP) wavers amid lack of data
The Pound (GBP) is treading water this morning, amid a continued drought of data releases which leaves it exposed to the market mood.
While this is allowing GBP to gain ground against more risk-sensitive assets, the bearish impulse is leaving it flat against others.
Furthermore, analysis of the Bank of England’s (BoE) forward path is likely keeping GBP static. While the BoE is expected to keep rates unchanged for an extended period, the timing of the first cut is under contention.
June is considered to be a potential starting point for the BoE to shift communication. James Smith, Developed Markets Economist at ING, explained:
‘We therefore think June’s meeting will, in practice, be the first ‘live’ meeting. At that point, the committee will have those inflation numbers for April and May, and another couple of wage figures to boot.’
The expectation is growing that an August rate cut could be on the cards, lending GBP support as the BoE may be the last major bank to begin loosening its policy.
US Dollar (USD) ticks upward amid bearish trade
The US Dollar (USD) is wavering higher this morning, due to a risk-averse market mood. Yesterday’s unexpected acceleration in producer prices has pared back Federal Reserve interest rate cut bets, pressuring the global economic outlook.
This gives room for the Fed to keep rates unchanged for a longer period of time, due to signs of persistent inflation.
This is underpinning USD this morning by shifting attention towards the Fed’s interest rate decision next week. While it is expected to keep rates unchanged, the timing of the first cut is still relatively up in the air.
Per CME’s FedWatch tool, 57.4% of investors expect the Fed to begin unwinding its policy in June. While the US economy appears resilient, labour data is indicative of a cooling jobs market.
Analysts at ING commented:
‘The Fed doesn’t want to cause a recession if it can avoid it and we believe they will be in a position to start moving monetary policy from a restrictive position to a more neutral stance before the summer.’
However, with the latest Michigan consumer sentiment data due this afternoon, USD is seeing its gains capped.
Pound US Dollar exchange rate forecast: Risk appetite in focus
Looking ahead for the Pound, next week’s session looks set to begin on a quiet note. Because of this, the increasingly risk-sensitive currency is unlikely to find a clear direction.
However, if the market mood improves significantly and prompts firmly bullish trade, Sterling could gain ground over USD.
It’s likely to be a similar story for the US Dollar too. With the Federal Reserve in blackout ahead of their next meeting, and data releases largely absent, the ‘Greenback’ may remain static.
On the other hand, should trading conditions sour, USD could enjoy safe-haven flows and gain ground over riskier currencies.