(Updated 14:15, 21/03/24) The Pound US Dollar (GBP/USD) exchange rate tumbled this afternoon in the wake of the Bank of England’s (BoE) decision to hold interest rates at 5.25%.
After fluctuating against the US Dollar (USD) this morning, the Pound (GBP) has plummeted amid surmounting expectations that the BoE could deliver the first interest rate cuts in the second quarter of 2024.
With BoE hawks Jonathan Haskel and Catherine Mann joining their more neutral peers in voting to maintain the current base rate, a notable shift from previously restrictive positions leaves GBP to face major selling pressure this afternoon.
Meanwhile, a rebound in the US Dollar (USD) follows a smaller-than-forecast number of initial jobless claims, which fell to 210,000, rather than increasing as forecast.
At the time of writing, GBP/USD is trading at €1.2706, this is down approximately 0.5% from its opening levels.
The focus moving forward is the UK’s latest retail data, while ramped up BoE rate cut bets will likely continue to stifle GBP’s upside potential.
Tomorrow, a speech from Fed Michael Barr may also drive USD volatility. Could a hawkish pivot boost the ‘Greenback’?
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Pound US Dollar (GBP/USD) wavers ahead of BoE update
The Pound US Dollar (GBP/USD) exchange rate is moving without a clear trajectory this morning ahead of a vote from the Bank of England’s (BoE) Monetary Policy Committee (MPC) this afternoon.
At the time of writing the GBP/USD exchange rate is trading at around $1.2775, virtually unchanged from this morning’s opening rate.
Pound (GBP) mixed ahead of central bank vote
The Pound (GBP) is trading in a wide range against the majority of its peers this morning ahead of the Bank of England’s looming interest rate decision.
The general consensus amongst markets and investors alike is that the central bank will maintain its current base rate of 5.25%, keeping interest rates near a sixteen year high.
However, markets will be on the lookout for any dovish dissent from BoE policymakers which could indicate that earlier rate cuts are on the table in the coming months.
Last month’s vote invoked a three-way split, in which BoE dove Swati Dhingra voted to lower the base rate, arguing that persistently high interest rates are stifling economic growth in the UK. Supporting rhetoric from Dhingra’s cohorts today may pave the way for summer rate cuts, thereby souring Sterling sentiment later in the session.
Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown, commented:
‘There may well be more dissenters around the table, arguing for earlier cuts, given the super-stagnant nature of the economy and the worry that inflation may end up undershooting the target not just briefly but for a more sustained period.’
The Pound will likely remain on the defensive for the remainder of the morning as hesitant investors refrain from placing any aggressive bets on GBP ahead of this afternoon’s market moving data.
US Dollar (USD) faces headwinds ahead of jobs data
The safe-haven US Dollar (USD) is subdued this morning as a spell of cheery trade prevents the ‘Greenback’ from recouping yesterday’s dovish losses.
The Federal Reserve delivered its decision to hold interest rates near a twenty-three-year high at 5.25-5.5% for a fifth consecutive time on Wednesday afternoon. Accompanying guidance erred on the side of dovish, with Fed Chair Jerome Powell suggesting that a tight US labour doesn’t necessarily negate the likelihood of summer rate cuts.
Powell also downplayed recent warming US inflation, negating market speculations that the unexpected inflationary uptick could lead to continually restrictive monetary policy.
Amid a lack of fresh data this morning, Powell’s dovish signals continue to weigh on the ‘Greenback’, ahead of key data due this afternoon, while upbeat trade further limits USD’s movements.
Pound US Dollar exchange rate forecast: BoE in focus
Looking forwards, the spotlight this afternoon is on the Bank of England’s looming interest rate decision. Should policymakers tilt dovish, indicating that the central bank’s unwinding cycle could begin mid-year, GBP may falter.
For the ‘Greenback’, a forecast uptick to 215,000 new jobless claims for the week ending 16 March could sour USD sentiment, reigniting concerns of a loosening labour market.
S&P’s latest preliminary PMIs are also due out in the US this afternoon and could imbue USD exchange rates with additional volatility. Both services and manufacturing indexes are due to report a dip in March, falling to 52 and 51.7, respectively. Slowing activity may serve to undermine the US Dollar, though with the indexes due to print well above 50, continued expansion in both sectors will likely keep USD afloat.
A speech from Fed Vice Chair Michael S Barr may also lift the ‘Greenback’, should Barr echo Powell’s dovish pivot, USD could slump.