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Pound US Dollar Exchange Rate Falls amid Risk-Off Mood

August 2, 2022 - Written by John Cameron

Pound US Dollar Exchange Rate Drops ahead of BoE Interest Rate Decision

The Pound US Dollar (GBP/USD) exchange rate slipped on Tuesday amid a prevalent risk-off trading sentiment. A poor outlook for the UK economy as well as subdued bets ahead of the Bank of England’s (BoE) interest rate decision may have also pulled the currency pair lower.

GBP/USD may have seen support from the Federal Reserve’s cautious tone, however.

At time of writing the GBP/USD exchange rate was at around $1.2201, which was down around -0.5% from the morning’s opening figures.

Pound (GBP) Slips as Investors await BoE Rate Hike Decision

The Pound (GBP) slumped against many of its rivals on Tuesday amid a retreat to global risk appetite. Bets on the currency were likely subdued ahead of the Bank of England’s (BoE) interest rate decision on Thursday.

Tuesday saw the prospect of a 0.5% rate hike from the BoE largely priced in by markets. Investors may have picked up on recently signals from Governor Andrew Bailey.

Speaking in weeks prior, Bailey stated that a 0.5% rate hike was ‘on the table’ for the BoE’s next meeting. Bailey also committed to curbing soaring inflation, ‘no ifs or buts’.

The UK’s cost-of-living crisis and poor economic may have also contributed to Sterling’s fall. On Tuesday, energy industry analysts warned that the UK’s energy price cap could rise by as much as 70% in October.

The predictions came amid political uncertainty for the country as the Conservative leadership contest entered its third week.

US Dollar Climbs as US-China Tensions Intensify

The US Dollar saw a boost on Tuesday amid a sustained risk-off mood in the markets. Fears of a global recession as well as a ratcheting up of tensions between the US and China.

The increased friction between the two nations came ahead of a visit to Taiwan by US House Speaker Nancy Pelosi. Sources claimed that Chinese warship and planes had been sighted in the Taiwan strait in the days leading up to Pelosi’s planned arrival.

A pullback in bets on aggressive future action from the Federal Reserve may have limited significant gains for USD on Tuesday. After raising interest rates last week, Fed Chair Jerome Powell stated that future rate hikes would be ‘data-dependent’.

Speaking on Tuesday, San Francisco Fed President Mary Daly reaffirmed the central bank’s cautious stance. Daly signalled that the Fed would be looking at incoming data to determine the pace of future rate hikes.

The Fed’s cautious tone also prompted a downturn to US Treasury bond yields, which likely also capped gains for the US Dollar.

GBP/USD Exchange Rate Forecast: Will BoE Raise Rates in Line with Forecasts?

The most significant data release for GBP this week will be the Bank of England’s interest rate decision on Wednesday. Whilst a 0.5% rate hike has now largely been priced in by markets, the decision could still lend support to the currency.

On the other hand, Sterling could slip if the central bank pursues a more cautious path and opts for a 0.25% hike.

Investors will also be looking to the minutes from the MPC’s latest meeting for any indicators of the BoE’s forward policy. Notable comments could prompt movement in the Pound.

Ahead of the BoE’s decision, the final reading of July’s services PMI could see the currency slip if the index drops as forecast on Wednesday.

For the US Dollar, a drop to the July PMI for non-manufacturing sectors could place pressure on USD if it prints as forecast on Wednesday.

Friday’s employment figures are likely to carry the most weight for the currency this week. The forecast fall to non farm payrolls figures could pull USD lower. Increased recession fears and signs of a cooling labour market could further dent confidence in the US economy.

July’s unemployment rate is predicted to remain low however, which could limit losses for the currency.

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