Pound US Dollar (GBP/USD) Exchange Rate Strengthened by Bets on Fed Rate Hike Pause

June 1, 2023 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Strengthened by Bets on Fed Rate Hike Pause

Pound US Dollar (GBP/USD) Exchange Rate Rises as Markets Pare Back Fed Bets

The Pound US Dollar (GBP/USD) exchange rate climbed on Thursday. The pairing was bolstered by bets of a potential rate hike pause from the Federal Reserve. Worse-than-expected output data for the US manufacturing sector added to the exchange rate’s downturn.

Additionally, Bank of England (BoE) rate hike bets buoyed the pairing.

On the other hand, more drastic gains for GBP/USD were limited by evidence of persistent tightness in the US labour market.

At time of writing the GBP/USD exchange rate was at around $1.2520, which was up roughly 0.6% from that morning’s opening figures.

US Dollar (USD) Stumbles despite Signs of Tight US Labour Market

The US Dollar (USD) came under fresh selling pressure on Thursday. A pullback in Federal Reserve rate hike bets pulled USD lower. The shift in sentiment around the Fed’s forward path also prompted a sharp decline in US Treasury bond yields which deepened the currency’s losses.

Dovish comments from Federal Reserve policymakers Philip Jefferson and Patrick Harker on Wednesday continued to drive bets on the central bank’s forward bath. Jefferson and Harker both signalled the possibility of a rate hike pause at the Fed’s June meeting.

Speaking in Philadelphia, Harker said:

‘Skipping a rate hike at a coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming.’

A greater-than-forecast decline in US manufacturing output also weighed on the ‘Greenback’. May’s manufacturing PMI fell to 48.4 versus the expected decline of 47 and was the seventh consecutive month of contraction.

USD’s losses were cushioned by surprisingly robust US jobs data, however. The latest jobless claims rose to 232,00 alongside better-than-expected private payroll figures.

Speaking on the unexpectedly hot figures, Oxford Economics’ lead US economist Nancy Vanden Houten said:

‘Labor market conditions are still tight. While we expect the Fed to leave rates steady at its upcoming meeting, a more sustained loosening of labor market conditions is needed to keep rate hikes permanently off the table.’

Pound (GBP) Boosted by Persistent BoE Bets

The Pound (GBP) climbed on Thursday and struck two-week highs against the US Dollar. Sterling was bolstered by Bank of England rate hike bets, although faced headwinds from evidence of a slowdown in the UK’s housing and manufacturing sectors.

According to figures released by Nationwide on Thursday, UK house prices fell by 3.4% year-on-year in May. Markets anticipated that further interest rate hikes from the BoE could prompt even worse headwinds for the market.

Conversely, the bets on additional action from the UK central bank underpinned GBP on Thursday. Markets continued to price in roughly 100bp from the BoE over the course of 2023.

The positive effect of these hawkish bets on GBP were limited by some evidence that UK companies are anticipating cooler inflationary pressures over the next 12 months. The BoE’s survey of British businesses found that most expected to raise prices and wages at a slower pace.

GBP/USD Exchange Rate Forecast: Will NFP Print Hotter-than-Expected and Boost USD?

The US Dollar could lose ground on Friday if high-impact employment data prints as forecast. May’s unemployment is expected to tick higher to 3.5%. Additionally, non farm payrolls figures are set have fallen last month with the US economy only adding 190,000 jobs.

The evidence of some slack in the US labour market may also prompt a pullback in bets on further policy tightening from the Fed. Markets could price in the chance of a rate hike pause in June as recently suggested by policymakers.

On the other hand, recent US employment data has surprised to the upside. USD could climb on Friday if the figures surprised to the upside and point to continued tightness in the US labour market.

The Pound will see no additional data releases over the rest of the week. The currency could continue to find support from bets on further interest rate hikes from the BoE.

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