The Pound-Dollar rate could rebound if UK growth beats forecasts, while further hawkish Fed commentary may keep the Greenback firmly supported.
The Pound US Dollar (GBP/USD) exchange rate retreated on Wednesday amid ongoing repricing of Federal Reserve interest rate expectations.
At the time of writing, GBP/USD was trading at around $1.3318. Down around 0.2% from Wednesday’s opening levels.
Pound to Dollar (GBP/USD): 1.32761 (-0.54%)
Dollar to Yen (USD/JPY): 159.87415 (+0.73%)
DAILY RECAP:
The US Dollar (USD) remained well supported on Wednesday, as USD investors continued to price in a more aggressive tightening cycle from the Federal Reserve.
This extends the sharp appreciation of the ‘Greenback’ seen on Tuesday in the wake of stronger-than-expected US inflation and particularly hawkish commentary from a Fed policymaker.
US inflation outpaced expectations in October, with Tuesday’s consumer price index reporting it rose 0.4% month-on-month, ahead of a forecast 0.3% increase.
This accompanied comments from Fed Governor Christopher Waller, who suggested that policymakers should consider a larger, 50-basis-point rate hike in December if underlying price pressures remain particularly stubborn.
The Pound (GBP) faced broad-based pressure on Wednesday, amid growing criticism of the Bank of England’s (BoE) ‘timid’ approach to monetary tightening.
The National Institute of Economic and Social Research (NIESR) warns that the BoE’s cautious approach to raising interest rates could leave inflation running uncomfortably above its 2% mandate for years to come.
Last week, the BoE lifted borrowing costs by 25 basis points to 4%, leaving the central bank well behind the curve when compared with its peers, many of whom have delivered multiple hikes this year amid the ongoing surge in energy costs.
The NIESR argued that interest rates may need to climb as high as 5% to effectively stamp out underlying price pressures, a terminal rate far higher than the projections endorsed by policymakers during last week’s monetary policy announcement.
Near-Term GBP/USD Forecast: Dovish BoE Rate Hike May Sap Sterling Sentiment
Turning to the second half of the week, the Pound to US Dollar (GBP/USD) exchange rate has the potential to rebound with the publication of the UK’s latest GDP figures.
Consensus forecasts point to a pickup in quarterly output, with growth projected to accelerate from 0.5% to 0.7%.
This may strengthen Sterling if it’s seen as giving the BoE more leeway to tighten monetary policy without worrying about choking off UK economic growth.
Meanwhile, USD investors will look to speeches by several Fed policymakers for fresh impetus on Thursday, with the ‘Greenback’ poised to surge if Waller’s colleagues echo his hawkish outlook on policy.
Our currency coverage draws on live market data, official economic releases and published bank research.