Pound US Dollar Exchange Rate News: GBP/USD Falls in Risk Averse Trade

October 31, 2022 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Falls in Risk Averse Trade

GBP/USD Exchange Rate Stumbles as Investors Brace for Central Bank Hikes

The Pound to US Dollar (GBP/USD) exchange rate fell on Monday morning as risk appetite receded ahead of a busy week for central banks.

At time of writing the GBP/USD exchange rate traded at around $ 1.1549, down roughly 0.5% from Monday’s opening levels.

US Dollar (USD) Gains Ground ahead of Fed Interest Rate Decision

The US Dollar (USD) was up against the majority of its peers on Monday as risk aversion bolstered the appeal of the safe-haven ‘Greenback’.

The cautious mood comes ahead of the Federal Reserve’s interest rate decision on Wednesday. Currently, markets are pricing in a 75bps hike., with US interest rates expected to rise from 3.25% to 4%.

With Wednesday’s hike largely priced in the focus will be on the US central bank’s forward guidance as USD investors look for any confirmation the Fed is planning to slow the pace at which is raises rates in the future.

Although, some analysts believe that a slowing of the Fed’s interest rate hikes is currently priced into the market.

MUFG analysts have said:

‘[T]he Fed would have to send a clear signal that it plans to slow rate hikes and sound more cautious over the need for further tightening to trigger a further leg lower for the US Dollar in the week ahead.’

Despite the debate over future interest rate hikes, the US Dollar enjoyed significant tailwinds on Monday ahead of the Fed’s decision.

Pound (GBP) Weighed Down by Bleak Economic Outlook

The Pound (GBP) faced significant headwinds on Monday, struggling against most of its peers as a lack of significant data left the currency little to work with.

The little data there was pertained to mortgage rates and borrowing rates, which made for poor reading. Mortgage approvals dropped by 10% in October and credit card borrowing fell from £1.215bn to £0.754bn, showcasing the cost-of-living crisis currently facing the UK consumer.

Whilst the Pound was dented on Monday, it’s possible that an undercurrent of aggressive rate hike bets limited the currency’s losses. GBP investors are expecting the Bank of England (BoE) to increase interest rates by 75bps on Thursday, the largest hike in 33 years.

The expectation of further aggressive monetary tightening has been stoked by BoE Governor Andrew Bailey. Earlier this month he said:

‘As things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August’.

Despite the expectation of a 75bps hike, the Pound remained dented on Monday, struggling for a foot hold amid bleak domestic headlines.

GBP/USD Exchange Rate Forecast: GBP to Fall Further amid Poor PMI?

Looking ahead, movement for the Pound US Dollar exchange rate could be caused by poor UK data expected on Tuesday.

The finalised manufacturing PMI could dent the Pound on Tuesday If it confirms a sharp contraction in the factory sector in October. The preliminary index plummeted from 48.4 to 45.8, its worst drop since May 2020. If, however, the contraction is less severe Sterling’s losses could be capped.

In the meantime, the undercurrent of rate rise bets pertaining to the BoE’s interest rate decision on Thursday could help to limit GBP’s losses.

Turning to USD, the currency could continue to firm ahead of the Fed’s interest rate decision on Wednesday if risk sentiment continues to soften.

This uptick in the ‘Greenback’ could be undermined by jobs data due on Tuesday. JOLTS job openings are expected to drop to 10 million, suggesting the jobs market is slowing.

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TAGS: Pound Dollar Forecasts