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Pound US Dollar Exchange Rate Firms on Bank of England Rate Hike Bets

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Pound US Dollar (GBP/USD) Exchange Rate Buoyed by Bank of England

The Pound US Dollar (GBP/USD) exchange rate has firmed during today’s session as markets increasingly anticipate a rate hike from the Bank of England (BoE) in February and Covid rules ease in England.

Combined with cooling US Treasury yields and a more upbeat market mood weighing on safe-haven demand for the ‘Greenback’, GBP/USD is trading around $1.3646 at the time of writing on Thursday afternoon.

Pound (GBP) Gains as BoE’s Bailey Fuels Rate Hike Bets

The Pound (GBP) has strengthened during today’s session after comments from BoE Governor Andrew Bailey bolstered investor expectations that the central bank will raise interest rates at its February policy meeting.

Speaking to the UK government’s Treasury Select Committee, Bailey warned that high inflation will last longer than expected and financial markets expect energy prices not to fall until the second half of 2023.

The BoE Governor also highlighted ‘some evidence’ that high inflation is beginning to influence employee pay deals, despite wage growth slowing in the UK’s November jobs data.

He also warned of inflationary pressure building from the tight UK job market by adding:

“(We) need to keep in mind inflation pressure from the labour market, this influenced my thinking on December rate rise.

“The tight labour market has the potential to put upward pressure on wage negotiations.”

Meanwhile, the UK government announcing the plan to end Covid measures in England also supported GBP exchange rates.

Health secretary Sajid Javid described the UK ending of restrictions as ‘a new chapter’ in the fight against Covid-19’, and that the country is ‘leading Europe in the transition from pandemic to endemic’.

Looking ahead, UK retail sales for December may dent Sterling going into the weekend, with forecasts pointing to a -0.6% contraction in growth as the Omicron variant hit.

The fall in consumer confidence may heighten concerns that UK GDP growth weakened in the fourth quarter of 2021 going into this year.

US Dollar (USD) Dented by Treasury Yields Retreat

The US Dollar (USD) is coming under pressure on Thursday afternoon as the recent rally in US Treasury yields to a two-year high has cooled and they have fallen back slightly, which in turn has limited USD.

At the same time, improving market sentiment is also weighing on safe-haven demand for the currency.

An unexpected rise in initial jobless claims last week has caused minor concerns over the US job market after claims rose to the highest level since October by 55,000 as Omicron hit the economy.

However, as the Federal Reserve view the impact of the Omicron variant as likely to be short-lived, expectations for four rate hikes in 2022 starting in March are capping USD losses.

Looking ahead, shifting market risk appetite looks likely to remain a key driver in the US Dollar going into the weekend amid a lack of notable US economic data releases.