One-Off BoE Interest Rate Hike Drags Pound to US Dollar (GBP/USD) Exchange Rate Down

August 2, 2018 - Written by Tim Boyer

STORY LINK One-Off BoE Interest Rate Hike Drags Pound to US Dollar (GBP/USD) Exchange Rate Down

On Wednesday, the Pound to US Dollar exchange rate opened in the region of $1.3126 and closed at a similar level, making daily movement minimal.

The static GBP/USD trading was down to tension among Pound Sterling traders in the lull before Thursday’s Bank of England (BoE) interest rate decision.

Although a rate hike seemed likely at the time, there was still uncertainty about whether the UK central bank would actually commit to a historic interest rate increase.

Wednesday’s US news included July’s ADP employment change reading, which showed a forecast-beating rise in employed persons with a 219k reading.

Other ecostats focused on the US manufacturing sector – new order growth slowed in July, but the number of manufacturing sector jobs rose; overall, sector activity was reported to have slowed.

Highly Anticipated BoE Interest Rate Hike Fails to Boost Pound to US Dollar (GBP/USD) Exchange Rate

The Pound (GBP) has fallen in trading against the US Dollar (USD) today, following the news that Bank of England (BoE) has raised interest rates from 0.5% to 0.75%.

This was a widely-expected decision from the UK central bank and came with the GBP-damaging caveat that the rate could be cut again if Brexit destabilises the UK economy.

There was also little indication that another rate hike in 2018 was likely – some economists immediately pushed their estimates for the next hike back to mid-2019.

GAM Investment Director Charles Hepworth has seen the news as a sign of potential problems in the future, saying:

‘Growth in the economy could hardly be described as above trend so [BoE policymakers] may have realised that this could be the last chance to move ahead before reaching the final Brexit end state.

‘In any case the BoE’s response in a few months’ time could look very different should the Brexit cliff edge slip nearer despite them saying more hikes will be needed.

‘The currency markets aren’t totally buying the hawkish message otherwise the Pound would be rising, which it most certainly isn’t’.

US Dollar to Pound (USD/GBP) Exchange Rate Rises after Positive Fed Meeting

In a reverse of the situation for the Pound (GBP), the US Dollar (USD) has risen in the pairing thanks to the latest news from the US central bank, the Federal Reserve.

Fed officials met on Wednesday evening and although they left interest rates at 2%, policymaker sentiment was so supportive that USD trader optimism rose.

The main positive takeaway was that there could be a US interest rate as early as September, which would make three of a predicted four total rate hikes this year.

Pantheon Macroeconomics Chief Economist Ian Shepherdson stated that the Fed is still likely to commit to a September and December interest rate hike despite international trade spats, saying:

‘This statement is a placeholder ahead of the quarterly forecast meeting next month.

‘We see no reason, then, to change our view that the Fed will hike in both Sep and Dec this year, but we don't expect any serious change in the language of the statement until December or March.’

Future Pound to US Dollar Exchange Rate Forecast: Are Greater GBP/USD Losses ahead on UK PMI Data?

The Pound (GBP) could make additional losses against the US Dollar (USD) on Friday morning, if July’s UK services sector PMI shows a slowdown as forecast.

Last month’s reading is tipped to slow from 55.1 points to 54.7; while minor, this movement might still be enough to unsettle GBP traders and weaken the Pound.

The UK services sector is the single largest contributor to national economic growth, so any signs of a slowdown might mean that difficult times are ahead.

A GBP/USD exchange rate decline on a PMI slowdown is especially likely, as this would break a three-month growth streak for the services sector.

On the other side of the currency pairing, there is a significant chance of US Dollar exchange rate gains on Friday afternoon’s US non-farm payrolls and unemployment rate data.

The non-farm payrolls reading is expected to show a lower number of jobs added to the economy in July with a 190k reading (below June’s 213k printing).

Despite this difference, a US Dollar-boosting figure above 213k is entirely possible as the non-farm payrolls measurement is known for missing or beating forecasts by a wide margin.

The other source of support for the US Dollar on Friday is July’s unemployment rate reading, which is currently tipped to show a reduction from 4% to 3.9%.

A falling jobless rate would make two more 2018 Fed interest rate hikes more likely, so could be enough to cause late-week US Dollar to Pound exchange rate gains.

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TAGS: Pound Dollar Forecasts