Pound US Dollar (GBP/USD) Exchange Rate Slips as BoE Signals Inflation set to Cool

Modified: Thursday, 11 May 2023 16:35 BST - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Slips as BoE Signals Inflation set to Cool

Pound US Dollar (GBP/USD) Exchange Rate Tumbles Following BoE Interest Rate Decision

The Pound US Dollar (GBP/USD) exchange rate slumped on Thursday. The pairing was pulled lower by signals of cooling UK inflation from Bank of England (BoE) Governor Andrew Bailey following the central bank’s interest rate decision. The exchange rate also fell amid a risk-off mood.

On the other hand, the possibility of additional rate hikes from the BoE in the coming months cushioned GBP/USD’s losses.

At time of writing the GBP/USD exchange rate was at around $1.2517, which was up roughly 0.9% from that morning’s opening figures.

Pound (GBP) Fluctuates amid 25bps Interest Rate Hike from BoE

The Pound (GBP) saw volatile movements on Thursday following the BoE’s interest rate decision.

Sterling strengthened in the immediate aftermath of the central bank’s 25bps rate hike. The meeting minutes released alongside the announcement indicated that the BoE would leave the door open to additional hikes.

Revised growth forecasts for the UK economy also bolstered the Pound. The BoE announced that it now foresaw the UK avoiding a recession in 2023.

However, dovish comments from BoE Governor Andrew Bailey following the meeting saw Sterling fall against many of its peers. Bailey signalled that inflation was cooling quicker-than-expected, leading markets to anticipate an upcoming pause in tightening from the BoE.

Speaking on the BoE’s likely path, ING’s Developed Markets Economist James Smith said:

‘We continue to feel that this will most likely mark the top in this tightening cycle, though we accept this is heavily contingent on the next set of wage and inflation data. Another hike in June is possible, though for now not the base case.’

US Dollar’s (USD) Gains Capped by Data Pointing to Easing Inflationary Pressures

The US Dollar (USD) steadily rose over the course of Thursday. The safe-haven ‘Greenback’ gained strength from a pullback in global risk appetite.

The reasons for the shift in market mood conversely hindered significant gains for the US Dollar. Markets remained concerned that the US might see a fresh crisis in its banking sector. Additionally, fears of a collapse in the US debt ceiling also kept pressure on the US Dollar.

Data release pointing to slowdown in the US economy also weighed on USD on Thursday. Jobless claims for the week ending May 6 rose to an 18-month high, indicating a cooldown in the US labour market.

A less-than-forecast increase in April’s PPI also added to speculation that the Federal Reserve’s policy tightening has had the desired effect on the US economy. Bets on a rate hike pause from the Fed dampened enthusiasm for USD.

GBP/USD Exchange Rate Forecast: Will UK Q1 Growth Strengthen Sterling?

The Pound could be pushed higher if Friday’s GDP figures print as expected. GDP data for the first quarter of 2023 is set to point to a 0.1% expansion in the UK’s economy.

However, March’s growth is set to idle after 0.1% growth in February. Signs that the UK’s economy could struggle in the second quarter may dampen any renewed enthusiasm for the Pound.

A speech from BoE Chief Economist Huw Pill on Friday could boost GBP if he gives any signals regarding the central bank’s forward path. Any hints of additional rate hikes in the coming months could inspire fresh market bets on action from the Bank of England.

The US Dollar could be pulled lower by a speech from Fed board member Michelle Bowman if she reaffirms the possibility of a pause in policy tightening. Bowman has previously been one of the central bank’s more hawkish rate-setters however, and any hints of the need for additional hikes could bolster USD.

Also on Friday, the latest consumer sentiment figures could underpin the US Dollar if they print as forecast. May’s reading is expected to be 63 which is close to February’s high of 67. An improvement in long-term prospects for businesses could provide an additional boost to USD, as well as any expectations of higher inflation.

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