Pound US Dollar Exchange Rate News: GBP/USD Wavered amid Cautious Market Ahead of Key Rate Decisions

Modified: Tuesday, 20 September 2022 13:05 BST - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Wavered amid Cautious Market Ahead of Key Rate Decisions

Pound (GBP) Subdued Ahead of BoE Rate Decision

The Pound (GBP) remained quiet on Tuesday after the long weekend due to the Queen’s funeral. With the postponed Bank of England (BoE) interest rate decision being pushed back to this week, markets are waiting by the sidelines.

With inflation still sitting at five times the central bank’s target, investors are expecting a 50bps rate hike, and some experts predicting a 75bps rate hike. UK government bond yields leapt Tuesday morning as investors are bracing for a bold interest rate hike. Odds for an aggressive 75bps rate hike have climbed to 75%, marking a seventh consecutive hike from the BoE, which would take the rate up to 2.5%. If predictions prove accurate, it would be the biggest rate hike since 1989.

Despite inflation softening last week, CPI still remains near a 40-year high and far above the target rate. Combined with Prime Minister Liz Truss’ pledge to cut taxes to spur economic growth, the BoE are under pressure to continue its monetary tightening. With the government deciding on capping energy bills for two years, it has shifted the tone within the BoE Monetary policy Meeting (MPC). Martin Beck, Chief Economic Advisor to the EY ITEM Club, noted that the energy cap is likely to see inflation peak lower than previously expected. Beck added:

‘(We) now expect CPI inflation to peak below 11% in October. Had the cap not been introduced, inflation was likely headed for 14%-15% early next year.

‘On the other hand, lower-than-expected energy bills would support disposable incomes and spending, implying that inflation may be higher in the medium term because of the cap. So, the net effect on the committee’s view on inflation appears ambiguous.’

Meanwhile, ahead of newly appointed Prime Minister Liz Truss’ trip to the US, she has admitted that there won’t be talks of a UK-US trade deal. On her first foreign trip since ascending to the role of prime minister, those who were hoping for a progression of one of the many so-called benefits of Brexit, a free trade deal with the UK’s strongest trade partner, will have to wait longer.

US Dollar (USD) Quiet Ahead of Expected 75bps Rate Hike

The US Dollar (USD), much like the Pound, remained relatively muted on Tuesday as investors take a back seat in anticipation of the interest rate decision by the Federal Reserve. Market forecasts the central bank to continue its monetary policy and raise interest rates by another 75bps this week.

If forecasts prove true, the Fed will raise interest rates by a substantial 75bps, or three-quarters of a point for the third consecutive time. The interest rate would be at 3.25%, the highest level in 14 years. Despite headline inflation softening somewhat, prices continue to rise, but the jobs market remains relatively strong. Evercore ISI Vice Chairman Krishna Guha warns that despite a soft landing, a recession could still be on the table. Guha added:

‘Even assuming ... it is still possible to bring inflation down... without a proper recession, the data and the response it will provoke substantially increases the risk that the Fed ends up overshooting badly and causing a recession anyway.’

GBP/USD Exchange Rate Forecast: All Eyes on Central Bank Decisions

Looking ahead, the market will be solely focussed on both the Fed and BoE interest rate decisions on Wednesday and Thursday respectively. After the Swedish central bank, Riksbank, hiked rate by 100bps, the markets became jittery. Bolder rate hike expectations could bolster both the US Dollar and Pound.

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