GBP/USD exchange rate firms amid US dollar weakness
The pound US dollar (GBP/USD) exchange rate is trending higher still today, as US dollar (USD) investors are hesitant to place hawkish bets ahead of Wednesday’s monetary policy statement from the Federal Reserve. Meanwhile, the pound (GBP) benefits from a risk-on market mood.
At the time of writing, GBP/USD is trading at $1.2528, having risen by almost 0.2% in the past 24 hours.
US dollar (USD) sinks on limited safe-haven appeal
The US dollar is subdued today, as investors dial back trading activity ahead of Wednesday’s big event. Depending upon the bank’s response to recent economic data and persistent price pressures, monetary policy expectations may be altered.
A surge of strength in the Japanese yen (JPY) further dents USD morale, given the rivalry between the two safe-haven currencies. Markets are speculating that the Bank of Japan (BoJ) or the country’s Ministry of Finance may have intervened in the forex market to support the Asian currency, although Japan’s top currency diplomat Masato Kanda appears reluctant to disclose whether this is the case.
Kanda told reporters that Japan ‘will continue to take appropriate action against excessive forex moves’, adding that the country is ‘ready to respond 24 hours, 365 days [of the year]’ to currency market volatility.
A general risk-on mood is detrimental to both the Japanese yen and the ‘Greenback’; today’s bullish momentum is likely compounding US dollar headwinds. Positive risk sentiment is thought to stem from a number of factors, including speculation that the Chinese Communist party’s central committee political bureau plans to loosen property policies.
Shares of Chinese property developers have rallied on hopes of additional stimulus measures to be introduced this week, with the aim of at clearing inventory, boosting sales and lifting home purchase restrictions.
‘There certainly is hope that the central and local governments will introduce more supportive measures,’ says Mark Dong, co-founder and general manager of Minority Asset Management in Hong Kong.
Pound (GBP) rallies despite lack of data
The pound is supported today by a risk-on mood, despite a lack of significant domestic data. Mixed guidance from the Bank of England (BoE) regarding the threat of inflation appears not to be weighing heavily upon the currency; markets appear broadly convinced that interest rate cuts will be delayed for the time being.
In mid-April, BoE Deputy Governor Dave Ramsden said that the risks of persistent inflation had receded; his comments were matched by those of Governor Andrew Bailey. Bailey told markets:
‘We’re pretty much on track for where we thought we would be in February on inflation… I expect next month’s inflation number will show quite a strong drop.’
Subsequent comments from Chief Economist Huw Pill and policymaker Jonathan Haskel countered this rhetoric, however. Pill announced on 23 April that the Monetary Policy Committee (MPC) ought to maintain restrictiveness in its monetary policy stance.
Economists are pricing in an interest rate cut either in June or August. James Smith, an economist at ING Financial Markets, comments:
‘We are leaning slightly towards August on the basis that one of the key things the BoE is looking at is service inflation.’
With the majority taking a hawkish stance, GBP investors are cheered at the prospect of reduced monetary policy divergence between the BoE and the Fed. The US central bank has likewise favoured a hawkish outlook recently and is expected on Wednesday to reiterate the need for consistent signs of deflation before pivoting to rate cuts.
GBP/USD exchange rate forecast: Wednesday rate decision to drive momentum
The pound US dollar exchange rate is likely to continue trading upon central bank speculation ahead of the Federal Reserve’s monetary policy decision midweek. Experts are resolved the bank won’t cut interest rates, but markets are keen to hear Fed’s predictions for the country’s economic outlook.
In the interim, several mid-tier data releases tomorrow may cause some fluctuation in the GBP/USD exchange rate. UK consumer credit is forecast to have increased in March – albeit not by much – while in the US, the Chicago PMI is forecast to show improvement while consumer confidence looks to have weakened.
Mixed data may lead to fluctuation, while better-than-expected outcomes could provoke a climb for either currency. If market sentiment remains upbeat, the pound is likely to enjoy further tailwinds.