Pound US Dollar Exchange Rate News: GBP/USD Rallied on Pared Fed Rate Hike Bets

February 9, 2023 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Rallied on Pared Fed Rate Hike Bets

US Dollar (USD) Undermined on Receding Rate Hike Bets

The US Dollar (USD) lost steam on Thursday as Federal Reserve interest rate bets continued to retreat.

Despite hawkish rhetoric from several Fed policymakers on Wednesday, USD investors, and the wider market, remain uncertain on the central bank’s monetary policy going forward. With uncertainty surrounding the Fed’s movements weighing on investors’ minds, they also played a part in exerting pressure on US Treasury bond yields as they slipped modestly.

Meanwhile, despite the uncertainty for the long-term, Fed Chair Jerome Powell admitted that rates might need to increase higher than expected if the US economy remains resilient. With inflation fears still looming, and a flurry of hawkish Fed speak, the safe-haven ‘Greenback’ could find some support.

Pound (GBP) Boosted by Improving Market Sentiment

Meanwhile, the Pound (GBP) found some support on Thursday morning despite a lack of economic data. Economists at HSBC have expressed optimism over the state of the UK economy as it expects a much less severe outlook. They added:
’The Bank of England (BoE) now sees a shorter, shallower recession than in its gloomy November forecast, which was based on much higher energy prices. The UK economy is now expected to contract almost 1% over the next five quarters, rather than 2.9% over the next eight quarters.

‘Finally, we think a less hawkish BoE could turn out to be GBP-positive later in the year, because of a potentially less abrupt policy shift.’

Elsewhere, BoE Governor Andrew Bailey and fellow MPC members testified before the House of Commons Treasury Select Committee on Wednesday morning. With MPs challenging the central bank over interest rate hikes, Bailey reiterated the BoE’s commitment in bringing inflation down to its target level of 2%. Bailey said:

‘Our job is to get inflation back down to target. The public will, of course, expect us to do that. And we will do it. I would, of course, expect the public to say, ‘it’s your job to get inflation down to target’ and my response is ‘yes it is, and we will do it’.
However, BoE policymaker Silvana Tenreyro did say she would consider supporting interest rate cuts, tempering rate hike bets. Tenreyro added:

‘Where things stand right now, I would see myself considering a cut. I don’t want to talk about the particular meeting, because meeting to meeting doesn’t make much of a difference.’

GBP/USD Exchange Rate Forecast: UK GDP Growth Data to Drag the Pound Down?

Looking ahead, the Pound US Dollar exchange rate could see further movement with the release of crucial GDP growth data for the UK. An expected downbeat economic growth could weigh on GBP investors. With MoM figures expected to decline and a stalling Q4 growth, Sterling could come under increased pressure.

Meanwhile, the US Dollar could see a boost if initial jobless claims surprise to the upside like last week. A persistently tight labour market could see the case for further rate hikes, buoying the ‘Greenback’.

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