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Pound US Dollar Exchange Rate News: GBP/USD Wavers amid Fed BoE Policy Divergence

June 17, 2022 - Written by John Cameron

Pound (GBP) Softens as BoE Remains Behind the Curve

The Pound (GBP) is softening today as policy divergence between the Bank of England (BoE) and other central banks is widening. With yesterday’s expected 25bps rate hike to 1.25% not overly inspiring investors, concerns are growing that the BoE is not doing enough to combat inflation.

The Pound saw a considerable upswing yesterday as hints were dropped that future price hikes could be bolder, in line with the three MPC members voting for a 50bps hike. With indications of the BoE heading down a more hawkish monetary policy path providing glimmers of hope to investors.

However, comments by BoE Chief Economist Huw Pill have cooled these expectations somewhat as he suggested he is wary of acting too aggressively:

‘The statement that we put out collectively is one that I think had a certain level of flexibility because it had to encompass those different views.

‘But at the same time, I think what we were trying to emphasise is that that flexibility also applies to what the decisions are. I don't think it's all about August. We talked about the pace, timing and scale of future decisions.’

Meanwhile, domestic politics threaten to weigh on the Pound as the fallout from Lord Geidt’s resignation continues. John Penrose, former anti-corruption champion, has warned Boris Johnson that not filling the recently vacated position of ethics adviser would be a mistake:

‘You can obviously change the role a bit, but you shouldn’t be weakening the role. If you’re going to come up with a revised version as a successor to Lord Geidt, some new format, some new way of dealing with the issue, that’s all fine. But it should be a question of how, not if.’

US Dollar (USD) Firms amid Gloomy Economic Outlook

The US Dollar (USD) is buoyed against most of its rivals today after the release of several minor data releases yesterday highlight concerns over the US economy, stoking global recession fears.

Aiding the ‘Greenback’s advances against the Pound is the recovery of US Treasury bond yields, up today by more than 1%, improving on a 3% loss posted yesterday, ahead of the proposed speech by Federal Reserve Chair Jerome Powell later today.

Lending further support to the US Dollar and more crucially in the long-term, is the continued hawkish stance from the Fed. With the doors left firmly open for another 75bps rate hike in July, the Fed is ahead of the curve when it comes to monetary policy, potentially buoying the ‘Greenback’.

Economists at HSBC are confident of further rate hikes ahead:

‘Over the medium-term, we continue to expect the USD to strengthen further, notably against the EUR and GBP, built on the Fed’s ongoing marked tightening compared to more measured steps at the European Central Bank and the Bank of England. A slowing global economy is also likely to add further to the USD’s gains.’

The combination of a downbeat global market and a continued hawkish central bank, safe-haven currencies such as the US Dollar could greatly benefit moving forward.

GBP/USD Exchange Rate Forecast: Fed Speech to Sink the Pound?

Looking ahead, all eyes will be on the Fed speech today by Jerome Powell. A potential boost to the US Dollar could be on the cards if Powell hints towards the Fed’s monetary policy going forward, especially if the central bank remains hawkish.

With no data for the Pound today, market movement will have to be dictated by sentiment alone, and with the continuing political mire that the UK finds itself in, the Pound could be set to slide further.

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