Pound US Dollar Exchange Rate News: GBP/USD Remains Muted amid Policy Divergence

June 15, 2022 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Remains Muted amid Policy Divergence

US Dollar (USD) Softens ahead of Fed Rate Hike

The US Dollar is subdued against most of its peers today as investors await the Federal Reserve’s highly anticipated interest rate decision tonight. A hotter-than-expected US consumer price index has bolstered expectations of a 75bps hike, a third consecutive rate hike.

With the inflation rate unexpectedly rising to a 40-year high last month, USD investors have hastily revised their rate hike bets. This has lent support to the US Dollar as it stoked concerns of a global recession, with economists at Charles Schwab warning:

‘Recession fear has risen swiftly this year. Inflation is rising at its fastest pace in decades, the Federal Reserve has begun what is expected to be an aggressive rate-hike cycle, global supply-chain problems persist, and the Russia-Ukraine war has upended commodity markets.

All this has driven a rise in market volatility and fear of a coming economic downturn.’

With global fears of a recession mounting, the US Dollar could benefit from concerned investors as the appeal of safe-haven currencies grow.

Pound (GBP) Slumps amid Dovish BoE’s Hike Expectations

The Pound (GBP) is facing increased headwinds today with the weight of hike expectations in line with the rest of the central bank’s monetary policies.

Experts are concerned that the Bank of England (BoE) is not doing enough to curb inflationary pressures as expectations of a 25bps hike falls way short of what is required. After the monthly GDP data showing a surprise contraction in April, there are concerns the BoE may maintain its cautious approach to raising interest rates.

If the BoE continues down its dovish path of policy divergence, the economic landscape looks bleak, with the threat of recession becoming more of a question of when, rather than if. Michael Hewson, Chief Market Analyst at CMC Markets, has warned of the repercussions of the BoE’s monetary policy:

‘The Bank of England has already lost the battle in avoiding a recession, the direction of travel is clear, we’re heading for a slowdown, which means they now face the choice of hiking hard now, in line with the Federal Reserve, and hope that they are able to cut later once inflation has come under control.’

Elsewhere, Brexit troubles are ever-present with the EU announcing it will be taking new legal action against the UK over the altering of the Northern Ireland protocol. Maroš Šefčovič, the EU’s Brexit Commissioner, has shared the disdain that the rest of the EU has towards the actions of the UK government:

‘Let there be no doubt: there is no legal, nor political justification whatsoever for unilaterally changing an international agreement. Opening the door to unilaterally changing an international agreement is a breach of international law as well.’

Piling further pressure on the Pound is the announcement of plans for a fresh Scottish independence vote set to take place next year in light of the economic and political turmoil currently gripping the UK.

GBP/USD Exchange Rate Forecast: Fed Rate Hike to Weigh Further on the Pound?

Looking forward, with a flurry of crucial data releases due out today, all eyes will be on the Fed’s interest rate decision tonight, ahead of the BoE’s turn tomorrow. If the Fed’s expected 75bps hike outpaces the meagre 25bps of the BoE, Sterling could come under continued pressure.

In the meantime, US retail sales are due to print, and despite being overshadowed by the looming interest rate hike, an expected increase of 0.2% could lend modest support to the US Dollar in the short term.

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TAGS: Pound Dollar Forecasts