Pound US Dollar (GBP/USD) Exchange Rate Bolstered by BoE Rate Hike Bets

March 20, 2023 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Bolstered by BoE Rate Hike Bets

Pound US Dollar (GBP/USD) Exchange Rate Climbs despite Risk-Off Mood

The Pound US Dollar (GBP/USD) exchange rate rose on Monday. The pairing found support from a downturn in US Treasury bond yields and bets on a 25bps Bank of England (BoE) rate hike.

On the other hand, the exchange rate’s gains were capped by a risk-off market mood.

At time of writing the GBP/USD exchange rate was at around $1.2217, which was up roughly 0.3% from that morning’s opening figures.

Pound (GBP) Bolstered by Renewed BoE Rate Hike Bets

The Pound (GBP) climbed on Monday despite a risk-off market mood. Sterling found support from market sentiment that the BoE will hikes rates by 25bps at its next meeting.

James Smith, Antoine Bouvet, and Francesco Pesole of ING said:

‘Despite encouraging signs that inflationary pressures are easing, we think the Bank of England will probably opt for one final 25bp hike on Thursday if it can, though that's undoubtedly contingent on what happens in financial markets.’

Gains for Sterling were capped by the possibility of further political instability, however. MPs from the DUP are expected to vote against the ‘Windsor Framework’ on Wednesday, prompting fears of further post-Brexit headwinds.

US Dollar (USD) Falls as Markets Anticipate Softer Fed Path

The US Dollar (USD) was pulled lower by a sharp downturn in US Treasury bond yields on Monday. A pullback in global risk appetite lent some support to the safe-haven ‘Greenback’, however.

The poor bond yield performance came as markets continually priced in a more cautious forward path for the Federal Reserve. A 25bps rate hike is widely expected from the Fed this week.

The central bank’s previously aggressive path of interest rate rises has been highlighted as a factor in the collapse of Silicon Valley Bank (SVB), however. This has led to speculation on a softer stance from the Fed.


James Knightley, Padhraic Garvey, and Chris Turner of ING said:

‘While the most prudent course of action may be to pause and digest the fallout from regional banking woes, the Federal Reserve is focused on inflation and will look to hike 25bp if conditions allow. With both higher borrowing costs and reduced access to credit set to weigh on growth and inflation, we continue to expect rate cuts in the second half of this year.’

GBP/USD Exchange Rate Forecast: Will BoE Look to Pause Policy Tightening?

Looking to the week ahead for the Pound, all eyes will be on the BoE’s interest rate decision on Thursday.

Ahead of this, fresh inflation data on Wednesday could add to bets on a policy tightening slowdown. February’s CPI figures are set to ease to 9.9% from 10.1% which could pull GBP lower.

The forecast 25bps rate hike from the BoE has been largely priced in by markets. If the central bank pauses rate hikes or hints at such in their forward guidance then it could pull GBP lower.

Data for the UK’s private sectors on Friday could see further losses for the Pound if it prints as forecast. February’s retail sales are set to rise by just 0.2%, down from the 0.5% increase in January.

Additionally, the PMI for the UK’s dominant services sector is expected to cool in March. The downturn in output could weigh on Sterling.

For the US Dollar, markets will be eagerly awaiting the Fed’s interest rate decision on Wednesday. The Fed is expected to hike interest rates by 25bps despite the turmoil in the US banking sector. The decision could lent support to USD.

Investors will also be looking to the Fed’s forward guidance for any signals of their future rate hike path. A cautious path in the face of banking sector instability could pull USD lower.

The latest jobless claims on Thursday could deepen any downturn for the US Dollar. The claims are forecast to remain close to previous levels, indicating a soft labour market.

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