Pound US Dollar (GBP/USD) Exchange Rate Rallies as BoE Assures Investors of Further Rate Hikes

Modified: Tuesday, 29 November 2022 13:35 BST - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Rallies as BoE Assures Investors of Further Rate Hikes

Pound US Dollar (GBP/USD) Exchange Rate Rallies as BoE Assures Investors of Further Rate Hikes

The Pound US Dollar (GBP/USD) exchange rate strengthened on Tuesday, as the Bank of England (BoE) reassured investors that further rate hikes were likely.

At the time of writing, GBP/USD traded at around US$1.2022, an increase of around 0.5% from Tuesday’s opening rates.

Pound (GBP) Firms as BoE Reasserts Tightening Policy

The Pound (GBP) strengthened against most peers on Tuesday, as the Bank of England (BoE) reasserted their desire to curtail inflation.

External member of the Monetary Policy Committee for the Bank of England Catherine Mann indicated that the only time the BoE would pull back on tightening was when inflation had begun to fall properly.

Mann stated in an interview that: ‘That there will be a peak that will serve to temper medium-term inflation expectations, and at that point, we have the opportunity to pull back from that peak. So we’re really managing in my view, it’s critical to manage inflation expectations, and in order to do that you might have to be a bit more aggressive in the near term so that you can then pull back once you have tempered those medium term inflation expectations.’

She further warned that there were signs of inflation becoming entrenched in UK businesses, which could be a sign of aggressive tightening to come. As such, investors responded by supporting Sterling during Tuesday’s session.

US Dollar (USD) Lags as China Enacts Vaccine Programme

The US Dollar (USD) struggled on Tuesday, as China’s attempt to increase Covid vaccinations prompted a swing towards positive risk-sentiment.

The safe-haven ‘Greenback’ seemed an unattractive prospect to investors, as the Chinese government began to increase Covid vaccination levels among the over-80s, following on from rare protests.

By taking this step, investors seemed reassured that China may be able to continue winding down their strict zero-Covid policy, and take steps to bolster the Chinese economy.

Federal Reserve officials added to the US Dollar’s woes on Tuesday, with a divide between analysts and Fed officials taking root. Fed officials took a decidedly hawkish stance towards curtailing inflation, with St Louis Fed President James Bullard indicating they still had ‘a ways to go to get restrictive.’

Analysts took umbrage with this attitude, believing that the current spate of economic data doesn’t support further tightening. Economists at Commerzbank stated: ‘There will probably be more hawkish statements from the Fed in the near future, but as long as the market does not get more solid arguments, especially that the key interest rate in the US will not be cut again next year, the USD is still unlikely to benefit.’

Pound US Dollar (GBP/USD) Exchange Rate Forecast: Tightening US Labour Market to Dent ‘Greenback’?

Looking ahead for the GBP/USD exchange rate, the Pound is lacking in economic data releases. As such, the key driver of movement may come from US data releases.

On Wednesday, the latest US private sector job creation figures are due to print. Analysts have forecast a fall from 239,000 to 200,000. Furthmore, JOLTs job openings are expected to show a similar fall from 10.717 million to 10.3 million. If both sets of data print as forecast, USD may weaken as the labour market shows signs of tightening.

Federal Reserve Chair Jerome Powell is scheduled to speak on Wednesday evening. With Fed officials currently striking a hawkish balance, to the chagrin of analysts and investors, if Powell continues down this avenue the ‘Greenback’ may suffer further despite the prospect of larger interest rate hikes.

For the Pound, policymakers are in focus. The Bank of England’s Chief Economist Huw Pill is scheduled to deliver a speech on Wednesday. If he continues the BoE’s current hawkish stance, Sterling may see support.

Elsewhere, domestic news in the UK may sway the pairing. With the UK in recession and the effects still being analysed by investors, negative news could pull GBP down.

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