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Pound US Dollar Exchange Rate News: GBP/USD Plummets Ahead of BoE Interest Rate Decision

May 5, 2022 - Written by John Cameron

GBP/USD Drops Ahead of BoE Interest Rate Decision



The Pound US Dollar (GBP/USD) exchange rate is falling as GBP investors brace for the latest interest rate decision from the Bank of England (BoE).

At the time of writing, the GBP/USD exchange rate is trading at approximately $1.2524, down roughly 0.7% from today’s opening levels.


Pound (GBP) Faces Headwinds as GBP Investors Await BoE Interest Rate Announcement



The Pound (GBP) is losing ground against the US Dollar (USD) this morning as GBP investors await the BoE’s latest interest rate decision.

Markets expect the bank will hike interest rates by 25-basis points as the BoE takes further steps to tame inflation in the UK.

This comes after inflation surged to a 30-year high of 7% in March.

Moreover, markets predict the central bank’s interest rate will reach 1.25% in the autumn, potentially rising to 1.5% next year.
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However, according to Berenberg Bank Senior Economist Kallum Pickering, the expected hike is ‘not without risk’.

Pickering continued:

‘On a policy relevant horizon - of say two years from now - the Putin shock will probably depress demand growth, which may also affect inflation dynamics over time.

‘If we are unlucky, the UK is already in the early stage of a recession.

‘Amid unusual uncertainty, policymakers - who should aim to minimise output losses over the business cycle - would better keep policy unchanged for now until incoming data dictate the appropriate policy response.’

However, as the rate hike is largely priced-in, many GBP investors will be focusing on the BoE’s forward guidance.

Should BoE maintain a dovish tone as expected, it is likely to weigh on GBP exchange rates.

In addition, the final reading of services PMI for April is offering GBP some limited support. The figures printed at 58.9, slightly above expectations of 58.3, though down from the previous reading of 62.6.


US Dollar (USD) Climbs in Response to Hawkish Fed



The US Dollar (USD) is gaining against the Pound (GBP) this morning after the Federal Reserve delivered aggressive action last night.

As predicted, the Fed raised interest rates from 0.5% to 1% in attempt to rein-in soaring inflation. This was the sharpest interest rate hike since the turn of the century.

In his accompanying statement, Fed Chair Jerome Powell dampened hopes for a 75-basis point hike in the near-term, delivering a less hawkish tone than expected. This initially caused USD exchange rates to plunge by almost 1%.

Powell stated:

‘Inflation is much too high, and we understand the hardship it is causing. We are moving expeditiously to bring it back down.

‘We need to do everything we can to restore stable prices. We will do it as quickly and effectively as we can.

‘We think we have a good chance to do it without significant increase in unemployment or sharp slowdown. But ultimately, we think about the medium and longer term, and everyone will be better off if we can get this job done – the sooner, the better.’

The US Dollar was quick to rebound however, with the prospect of several more rate hikes in 2022 and a jump in US Treasury yields underpinning the ‘Greenback’.


GBP/USD Exchange Rate Forecast: BoE Rate Hike Takes Spotlight



Looking ahead, the Pound US Dollar will no doubt be driven by the BoE’s interest rate hike decision and forward guidance this afternoon.

Should the bank strike a dovish tone it will almost certainly weaken GBP exchange rates.

On the other hand, the US Dollar is likely to be buoyed by April’s non farm payrolls: the figures are expected to show a modest drop from 431K to 391K, but this will still be a robust reading.

Moreover, the US unemployment rate for April is predicted to drop from 3.6% to 3.5% further reinforcing demand for the US Dollar.

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