Pound US Dollar Exchange Rate Narrows as BoE Rate Hike Bets Ease

October 28, 2022 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate Narrows as BoE Rate Hike Bets Ease

Pound US Dollar (GBP/USD) Exchange Rate Narrows as Investors Readjust BoE Hike Bets

The Pound (GBP) saw muted trade against the US Dollar (USD) on Friday, as investors readjusted their expectations towards the Bank of England’s upcoming interest rate decision.

As such, GBP/USD traded at around US$1.1583 at the time of writing, showing minimal change from Friday's opening rates.

Pound (GBP) Muted as Investors Adjust Rate Hike Expectations

Friday saw the Pound (GBP) endure muted trade, as investors grew cautious around the UK’s fiscal plans. The uncertainty saw the Pound (GBP) dip against the US Dollar (USD).

Following on from Chancellor Jeremy Hunt’s delay of the fiscal plan from 31 October to 17 November, analysts noted that the move has left the Bank of England (BoE) somewhat in the dark. The BoE is due to come to a decision on further interest rate hikes, but now has to make this choice without knowing the details of the UK government’s fiscal policy.

Because of this, markets are anticipating the possibility of a lower rate hike from the BoE than previously expected. While 75bps is the current expectation, Friday saw investors begin to price GBP to match a smaller 50bps hike. As such, GBP lacked strong support during Friday’s session.

However, the dents are not extreme – Sterling is still buoyed by investor confidence in Rishi Sunak, with analysts understanding that he wishes to get the budget right, and that the delay was necessary to accomplish this goal.

Elsewhere, domestic issues have continued to weigh on Sterling. Suella Braverman’s reappointment as Home Secretary may have concerned investors, as she was accused of multiple breaches of the ministerial code.

US Dollar (USD) Rallies as Core PCE Index Increases

Friday saw the US Dollar strengthen across the board, as the YoY PCE price index showed an increase from 4.9% to 5.1%.

Despite this being below a forecast of 5.2%, as the Federal Reserve’s preferred gauge of inflation, investors clamoured to the ‘Greenback’ as the gauge all but guaranteed decisive action from the Fed.

With a 75bps hike already priced in, investors have been keeping a close eye on various US data releases and rhetoric from Fed policymakers. With this increase, the rate hike is all but confirmed ahead of next week’s decision.

Elsewhere, the safe-haven ‘Greenback’ has seen support as the economic outlook for the wider globe continued to look bleak, with a raft of inflation spikes across the Eurozone and a hawkish reaction from the European Central Bank (ECB) leading to a bleak outlook for the bloc. This allowed USD to capitalise on wider investor trepidation.

Similarly, with the Japanese Yen (JPY) and Chinese economy showing weakness, the USD proved to be an attractive prospect in Friday’s risk-averse market.

With the Fed looking to ease rate hikes in the future, support for the US Dollar may begin to wane.

Pound US Dollar (GBP/USD) Exchange Rate Forecast: Interest Rates in Focus

Looking ahead, the Pound US Dollar (GBP/USD) exchange rate will see key pressure points from both sides of the pairing.

Wednesday will bring the interest rate decision from the Federal Reserve. While a 75bps rate hike has largely been priced in, the press conference that follows may buoy USD further should the Fed reiterate their desire to curb inflation rates.

Similarly, Thursday sees the interest rate decision from the Bank of England (BoE). Due to the current uncertainty around the BoE’s next step, a lower than expected rate hike could mute potential gains for Sterling.

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