Pound US Dollar Exchange Rate News: GBP/USD Plummeted as BoE Hikes Rates to 3.5%

December 16, 2022 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Plummeted as BoE Hikes Rates to 3.5%

Pound (GBP) Tumbled after BoE Hiked the Cash Rate to 3.5%

The Pound (GBP) sank on Thursday in the wake of the Bank of England (BoE) raising interest rates by an expected 50bps. Despite meeting expectations of a half percent rise, the ever-gloomy economic climate failed to lift investors.

Without an accompanying statement from the BoE Governor Andrew Bailey, GBP investors had to delve into the vote split to determine possible monetary policy going forward. After last month’s 7-2 split over hiking 75bps, The MPC voted 6-3 on a 50bps raise. The central bank’s cash rate, now sitting at 3.5%, is at the highest level since 2008.

With fears of a looming recession, the BoE also confirmed that the housing market has weakened. Coinciding with downbeat economic forecasts for 2023 and beyond, the minutes from Thursday’s policy meeting expressed concern over the housing market. Chancellor Jeremy Hunt responded to the BoE’s interest rate decision by emphasising the importance of bringing inflation down to the target level of 2%. Hunt said:

‘I know this is tough for people right now, but it is vital that we stick to our plan, working in lockstep with the Bank of England as they take action to return inflation to target.

‘The sooner we grip inflation the better. Any action which risks permanently embedding high prices into our economy will only prolong the pain for everyone, stunting any prospect of economic recovery.’

US Dollar (USD) Climbed Amid Hawkish Fed Stance

Meanwhile, the US Dollar (USD) was buoyed by a hawkish stance from the Federal Reserve. Along with an expected 50bps rate hike from the central bank, which brought the cash rate to 4.5%, Fed Chair Jerome Powell promised further rate hikes.
Powell continued to boost investors’ hopes as he outlined the central bank’s intentions of raising interest rates to 5% and possibly 5.25% during 2023. After inflation softened to 7.1%, many analysts believed inflation had peaked. However, Powell disputed these claims and argued that inflation had far from peaked. He added:

‘Historical experience cautions strongly against prematurely loosening policy. I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2% in a sustained way.’

Meanwhile, troubling data from China popped the optimism bubble and soured global risk sentiment, boosting safe-haven flows. Downbeat retail sales, poor industrial production, and climbing unemployment out of China more than offset the optimism over the scaling back of the strict zero-Covid policy.

GBP/USD Exchange Rate Forecast: Downbeat UK Consumer Data to Sour Sterling?

Looking ahead, the Pound US Dollar exchange rate could see further fluctuations with the printing of UK retail sales. With an expected downturn in retail sales, the troubled UK economy could see Sterling slip lower as retail sales MoM are expected to fall further at 0.6%.

Meanwhile, US PMIs could weigh on the US Dollar amid an expected slowing in both services and manufacturing.

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