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Pound US Dollar Exchange Rate News: GBP/USD Slipped Despite BoE Raising Interest Rates by 50bps

August 4, 2022 - Written by John Cameron

Pound (GBP) Plummeted Despite Substantial Interest Rate Hike

The Pound (GBP) suffered substantial losses as the Bank of England (BoE) issued a concerning assessment of the UK economy. Despite raising interest rates by the fastest rate in 27 years, the central bank also warned that the UK economy is headed straight for a recession by the end of the year.

In a statement accompanying the rate hike to 1.75%, the BoE said:

‘GDP growth in the United Kingdom is slowing. The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe.

‘Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.’

BoE Governor Andrew Bailey followed the central bank’s interest rate decision with a press conference in which he remarked that near-term inflationary pressures have significantly intensified. Soaring energy prices, mainly in part due to Russia’s invasion of Ukraine, has significantly contributed to UK inflation.

With UK inflation set to peak at around 13.3% in October, and only barely returning to single digits in a year’s time, the outlook is bleak. The cost-of-living crisis is set to continue throughout that time, with the UK economy expected to contract throughout the entirety of 2023. Matthew Ryan, Head of Market Strategy at Ebury said of the interest rate decision and the dire economic outlook’s impact on Sterling’s slide:

‘Sterling has fallen fairly sharply against its major peers so far this afternoon following a very doom and gloom assessment of the UK economy from the Bank of England. The vote on interest rates was actually rather hawkish, with eight of the nine MPC members in support of an immediate 50 basis point rate increase.’

US Dollar (USD) Softened amid Geopolitical Tensions

The US Dollar (USD) struggled to find much demand and remained fairly muted against most of its rivals as US House of Representatives Speaker Nancy Pelosi’s controversial visit to Taiwan has stoked geopolitical tensions, weighing on global market sentiment.

Without the backing of US President Joe Biden, Pelosi irked Beijing who responded by displaying a show of force and conducted live-fire drills surrounding the island of Taiwan. Taiwan’s Foreign Ministry issued a statement in the wake of China’s reaction to Pelosi’s visit:

‘On 4 August, China launched multiple ballistic missiles into waters to the northeast and southwest of Taiwan, threatening Taiwan’s national security, escalating regional tensions, and affecting regular international traffic and trade.

‘The Ministry of Foreign Affairs (MOFA) of the Republic of China (Taiwan) strongly condemns the Chinese government for following the example of North Korea in wilfully test-firing missiles into waters near other countries, and demands that China exercise self-restraint.’

Chinese officials had warned the US of visiting the island of Taiwan, and since Pelosi touched down in Taipei, has also provoked the Kremlin in calling the visit an ‘unnecessary provocation’. The visit comes in the midst of a planned meeting between Biden and China’s President Xi Jinping, potentially now souring the already tense relationship.

GBP/USD Exchange Rate Forecast: US Employment Data to Weigh on the US Dollar?

Looking ahead, the Pound US Dollar exchange rate could see further movements as crucial US employment data will be released on Friday. With an expected fall in non-farm payrolls, it could point to a weaker labour market with the third consecutive drop.

Elsewhere, the Pound will continue to be left vulnerable to market sentiment. With such a bleak economic outlook for the BoE, further headwinds could continue to weigh on Sterling.

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