Pound US Dollar (GBP/USD) Exchange Rate Gains as US Debt Ceiling Resolution Nears

May 30, 2023 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Gains as US Debt Ceiling Resolution Nears

Pound US Dollar (GBP/USD) Exchange Rate Climbs as Risk Appetite Improves

The Pound US Dollar (GBP/USD) exchange rate rose on Tuesday. An improving market mood buoyed the exchange rate, although the pair’s gains were hobbled by fresh Federal Reserve rate hike bets.

The pairing also found support from bets on further policy tightening from the Bank of England (BoE).

At time of writing the GBP/USD exchange rate was at around $1.2405, which was up roughly 0.5% from that morning’s opening figures.

US Dollar (USD) Tumbles as Markets Anticipate US Debt Ceiling Resolution

The US Dollar (USD) stumbled over the course of Tuesday. A return of global risk appetite contributed to losses for the safe-haven ‘Greenback’, as well as a sharp downturn in US Treasury bond yields.

The improving market mood came amid news that US President Joe Biden and Republican House Speaker had reached an agreement to resolve the country’s debt ceiling crisis.

The reduced prospect of a collapse in the world’s largest economy pushed investors towards riskier assets, which weakened the US Dollar.

On the other hand, USD’s losses were cushioned by fresh bets on additional rate hikes from the Federal Reserve.

Speaking on the chances of further Fed hikes, ING’s Chris Turner said:

‘Last Friday's US data set made the firm case for one additional 25bp Fed hike – now fully priced by the time of the 26 July meeting. Money markets price a 63% chance of that hike coming earlier at the 14 June meeting – a meeting which will likely see the Fed have to raise its inflation forecasts.’

Pound (GBP) Bolstered by Expectations of Additional BoE Hikes

The Pound (GBP) found support from aggressive BoE rate hike bets on Tuesday. An improving market mood also bolstered Sterling.

Markets are pricing in around 100bp worth of tightening from the central bank by November. The renewed bets came after forecasts of even higher inflation in the UK from Wall Street bank Goldman Sachs.

Speaking on the BoE’s forward path, analysts at Goldman Sachs said:

‘Our analysis reinforces our view that resilient growth, a tight labour market, and persistent inflationary pressures will convince the MPC to deliver significant additional tightening. We maintain our forecast of two further 25bp hikes at the upcoming June and August meetings for a terminal policy rate of 5%, but see risks to our terminal rate forecast as skewed to the upside.’

GBP/USD Exchange Rate Forecast: Will Softer US Jobs Data Pull US Dollar Lower?

USD investors will be keenly awaiting key labour market data this week. April’s JOLTS job openings are expected to decline further on Wednesday which may contribute to speculation of a cooling US labour market. If the figures print as forecast, it could lead to markets to pare back their Fed rate hike bets and pull the US Dollar lower.

Friday’s higher-impact jobs data could add to this sentiment if it prints as expected. May’s unemployment is forecast to edge higher to 3.5%. Additionally, non farm payrolls are set to slow to show that the US economy added only 190,000 jobs in May. Markets may take this data as evidence that the Fed will not push ahead with further policy tightening.

Multiple speeches from Federal Reserve policymakers over the rest of this week could add to the sentiment surrounding the central bank’s forward path.

Finally for USD, the latest output data for the US manufacturing sector on Wednesday could prompt additional losses in the currency. May’s ISM Manufacturing PMI is expected to edge lower for a seventh consecutive month to 47, indicating that the sector remains in negative territory.

The Pound will see a sparse data calendar over the coming week. The final reading of May’s manufacturing PMI on Thursday could dent confidence in Sterling if it confirms a slowdown in the sector.

Aside from this, bets on further rate hikes from the BoE could keep GBP buoyed over the coming week.

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