Pound US Dollar (GBP/USD) Exchange Rate Soars as Markets Pare Back Fed Rate Hike Bets

Modified: Wednesday, 23 November 2022 16:35 BST - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Soars as Markets Pare Back Fed Rate Hike Bets

Pound US Dollar (GBP/USD) Exchange Rate Leaps amid Speculation on Fed Rate Hike Slowdown

The Pound US Dollar (GBP/USD) exchange rate soared on Wednesday. The currency pair was bolstered by a risk-on mood and better-than-forecast UK PMI figures.

The paring back of bets on Federal Reserve interest rate hikes by markets also helped boost GBP/USD. A raft of US data releases added to this speculation.

At time of writing the GBP/USD exchange rate was at around $1.2061, which was up roughly 1.4% from that morning’s opening figures.

US Dollar (USD) Pulled Lower by Paring Back of Fed Bets

The US Dollar (USD) slumped on Wednesday as markets continued to pare back bets on aggressive interest rate hikes from the Federal Reserve. A risk-on market mood also pushed the safe-haven ‘Greenback’ lower.

Several data releases on Wednesday added to speculation that the Fed would slow its pace of policy tightening. A sharp rebound in October’s durable good figures indicated that the US manufacturing sector was holding up well despite higher borrowing costs.

Economists highlighted that higher Fed rate hikes could deter further investment in the sector, which in turn caused the figures to add to the currency’s woes.

An above-forecast rise in jobless claims also added to evidence of a slowdown in Fed policy. Jobless claims rose to 240,000 last week, pointing to a cooling labour market.

Dovish comments from Fed policymaker Loretta Mester earlier in the week also added to bets on a Fed slowdown.

Speaking on Monday, Mester said:

‘I think we can slow down from the 75 at the next meeting. I don't have a problem with that, I do think that's very appropriate.’

Away from Fed rate hike bets, the latest PMI figures on Wednesday indicated a contraction across the US private sectors. The figures also pushed USD lower.

Pound (GBP) Climbs Despite Private Sector Downturn

The Pound (GBP) climbed on Wednesday. The currency drew support from the release of better-than-forecast PMI figures.

November’s PMI data saw the UK’s private sectors contract by less than forecast. The reading for the manufacturing and services sectors held steady at 46.2 and 48.8 respectively.

Overall conclusions for the data were less positive, however. The data indicated the fastest fall in economic activity since January 2021, adding to signs of a recession which capped gains for Sterling.

Chris Williamson, chief business economist at S&P Global, said:

‘A further sharp fall in business activity in November adds to growing signs that the UK is in a recession, with GDP likely to fall for a second consecutive quarter in the closing months of 2022.’

The data from S&P Global also brought the latest analysis of business expectations in the UK. Williamson outlined that, whilst business confidence had improved, the mood remained ‘the gloomiest seen over the past quarter century’.

Sterling was also pushed higher on Wednesday by bets on further interest rate hikes from the Bank of England (BoE). A poll conducted by Reuters and released on Wednesday found that over 75% of respondents forecast a 50bps hike.

GBP/USD Exchange Rate Forecast: Will BoE Speeches add to Rate Hike Bets and Bolster GBP?

Looking to the week ahead for the Pound, speeches from multiple Bank of England (BoE) board members on Thursday could see the currency climb. Investors will be looking for any hawkish signals from policymakers.

Also on Thursday, November’s industrial trends figures could weigh on Sterling if they print as forecast. The data is expected to indicate a slump in the manufacturing sector’s performance.

Calls for further industrial action across many of the UK’s public and private sectors could also keep pressure on GBP.

For the US Dollar, the latest FOMC minutes on Wednesday could help the currency climb if they reaffirm the Fed’s path of further interest rate hikes.

With no other significant data for USD this week, the ‘Greenback’ is likely to be affected by any shifts in risk appetite.

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TAGS: Pound Dollar Forecasts