Pound US Dollar Exchange Rate Hits Two Week Low as Investors Await BoE Rate Decision

November 3, 2022 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate Hits Two Week Low as Investors Await BoE Rate Decision

Pound US Dollar (GBP/USD) Exchange Rate Strikes Two Week Low as Investors Eye BoE Rate Hike

The Pound (GBP) fell against the US Dollar (USD) on Thursday, as investors anticipated the Bank of England’s (BoE) latest interest rate decision.

At the time of writing, GBP/USD traded at roughly US$1.1241, a plunge of around 1.3% from Thursday’s opening rates.

Pound (GBP) Drops as Investors Await BoE Rate Hike

The Pound (GBP) fell across the board on Thursday, as investors awaited the Bank of England’s (BoE) next interest rate decision.

On the back of inflation striking a 40-year high of 10.1% in September, far beyond the BoE’s desired 2%, the Bank is determined to get on top of inflation to prevent further economic strife for households.

Markets already priced in an expected rate hike of 75bps, but the question of just how far the BoE can go without full knowledge of the UK Government’s fiscal policy is weighing upon investors. Analysts began to expect a more dovish interest rate hike, in order to balance curtailing inflation with preventing further economic damage from high interest rates.

With the UK already staring down a recession, the BoE was under pressure to control inflation without causing further damage.

Craig Erlam, Senior Market Analyst at OANDA expanded upon this. He reflected upon the challenge ahead for the BoE, and stated: ‘The central bank has had the unenviable job of fighting soaring inflation amid enormous economic and political uncertainty.
In recent months the country has had three Prime Ministers, three very different economic agendas, and no budgets outlining them. Not ideal for a central bank that’s fighting double-digit inflation.’

However, a smaller than expected rate hike and a dovish outlook from the Bank may well dent the Pound further.

US Dollar Rallies as Fed Strikes Hawkish Tone

The US Dollar (USD), however, rallied on Thursday on the back of the Federal Reserve’s 75bps rate hike on Wednesday night.

While the large hike was already priced in and widely expected by markets, the Fed was expected to signal a slowdown in their tightening policy from December onwards.

Jerome Powell, the Chair of the Federal Reserve, quelled the rumours by stating: ‘We’ve always said it was going to be difficult, but to the extent rates have to go higher and stay higher for longer it becomes harder to see the path. It’s narrowed. I would say the path has narrowed over the course of the last year.’

With the Fed striking a decidedly hawkish tone after the decision, investors flocked to support the ‘Greenback’ as it seemed likely that aggressive tightening would continue due to the resilience of the US economy when contrasted against a global downturn.

Fed Chair Powell even went on to suggest that the terminal rate for interest rates would be higher than previously expected, as the Fed aims to prevent high inflation becoming entrenched.

Pound US Dollar Exchange Rate Forecast: US Data to Dent USD?

Looking ahead, Friday brings a raft of data releases for the US. The non farm payrolls and unemployment rate for October are due to be published, with the payrolls expected to show a drop in the creation of new jobs.

Should these data releases print as forecast, the ‘Greenback’ may be weakened as they point to a weaking labour market.

For the UK, the predominant focus will be on Today’s BoE meeting, due to the uncertainty that surrounds the rate hike decision.

With a return to austerity anticipated from the UK Government, the BoE policymakers may opt for a more modest rate hike of 50bps to prevent further tightening of the UK economy, which may already be in recession.

Friday brings a speech from the BoE’s chief economist Huw Pill. Investors may keep a close eye on his attitude to the Bank’s tightening policy. A more dovish approach could dent Sterling.

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