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Pound US Dollar Exchange Rate News: GBP/USD Firms amid Robust UK Labour Market

July 19, 2022 - Written by John Cameron

Pound (GBP) Firms Despite Mixed Employment Data

The Pound (GBP) is climbing against some of its rivals today as employment figures came in better than expected and unemployment data remained unchanged at 3.8%. A record increase of 296,000 people entered the full-time workforce in the month of May.

Despite the worsening cost-of-living crisis, the economic inactivity rate fell by 144,000, the biggest drop since the start of the pandemic. A robust labour market lends considerable support to the Pound as it could also increase the chances of a steeper rate hike by the Bank of England (BoE).

Economists at ING believe the mixed jobs data is unlikely to influence policymakers, but signs still point to a 50bps hike, buoying the Pound:

‘Those that have been pushing for 50bp rate hikes will remain concerned about worker shortages and the impact on wage growth, while the doves will focus on some fresh signs that the jobs market is no longer tightening.’

Lending further support to expectations of a bolder rate hike from the BoE comes after hawkish comments from Monetary Policy Committee (MPC) member Michael Saunders. Warning that the cost of rising rates too slowly is probably worse than raising rates too much:

‘With excess demand and elevated inflation, 'too little, too late' would increase the likelihood that recent trends in underlying pay growth, longer-term inflation expectations and firms' pricing strategies become more firmly embedded.’

However, the other side of the employment data paints a worrying picture, which could cap any further gains for Sterling. Wage growth continues to lose pace and cannot keep up with inflation. Real pay excluding bonuses saw a record slump by 2.8% in the three months up to May.

US Dollar (USD) Under Pressure as 100bps Rate Hike Expectations Slashed

The US Dollar (USD) remains subdued today as aggressive rate hike expectations soften. Despite higher-than-expected US inflation prompting investors to expect a bolder rate hike, the odds of a bold 100bps hike are waning.

Several Federal Reserve policymakers are continually playing down the Fed following in the footsteps of the Bank of Canada (BoC) and raising interest rates by 100bps. With the US Dollar exchange rates hitting 20-year heights last week, it has since slumped to levels not seen since early July.

Goldman Sachs Chief Economist Jan Hatzius commented that a myriad of recent developments has cooled the hawkish Fed’s aggressive stance. Declining fuel prices play a part in the Fed not wanting to raise rates by more than 75bps at the next policy meeting:

‘This softening of inflation expectations is one reason why we expect the FOMC will not accelerate the near-term hiking pace and will deliver a 75bp hike at the July FOMC meeting.’

GBP/USD Exchange Rate Forecast: BoE Bailey Speech to Strengthen Pound Further?

Looking forward, a speech by BoE Governor Andrew Bailey could inspire further movement with the Pound as speculation continues over whether the central bank will raise rates by 50bps at their next policy meeting.

Elsewhere, the US Dollar is hoping to regain some momentum as Fed policymaker Lael Brainard is set to make a speech this evening. Any indicator of an aggressive 100bps rate hike could boost the ‘Greenback’.

Looking beyond today and the Pound could see further fluctuations as inflation figures are released on Wednesday. An expected uptick could further lend support to Sterling as expectations grow of the BoE raising interest rates.

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