Pound US Dollar (GBP/USD) Exchange Rate Edges Higher on BoE Rate Hike Bets
The Pound US Dollar (GBP/USD) exchange rate is making modest gains at the start of this week and trading above $1.34, recovering from the one-month low GBP/USD hit towards the end of last week’s session.
Markets widely anticipating the Bank of England (BoE) raising interest rates at its February monetary policy meeting on Thursday is underpinning Sterling support, although uncertainty lingers over the future of UK Prime Minister Boris Johnson.
Pound (GBP) Steady ahead of BoE Rate Decision
The Pound (GBP) is firming on Monday morning as expectations for the BoE to tighten monetary policy underpins GBP exchange rates.
Many investors have priced in a rate hike to 0.5% from 0.25% in an attempt to lower the UK inflation rate, the second rise in as many policy meetings.
The rise in interest rates could also signal a move towards the central bank reducing its £875 billion asset holdings of government bonds that it purchased during the pandemic to support the UK’s economic recovery.
Meanwhile, the report by senior civil servant Sue Gray into possible Downing Street lockdown breaches arrived in Downing Street on Monday morning and could stoke volatility in Sterling in the coming days.
If the inquiry shows any wrongdoing by UK Prime Minister Boris Johnson, the prospect of Conservative MPs forcing a leadership contest through a vote of no confidence, or his resignation, may drive additional movement in the Pound.
Finalised UK manufacturing and services PMIs for January published this week could also weigh on Sterling sentiment, if the indexes receive any downward revisions that would indicate slowing business activity.
At the same time, ongoing UK-EU post-Brexit negotiations continue to drive GBP movement, with cautious optimism for a deal by mid-February.
US Dollar (USD) Rally Cools
The US Dollar’s (USD) rally has eased on Monday after surging through the second part of last week.
A risk-off mood fuelled by concerns over a Russian invasion of Ukraine has bolstered demand for the safe-haven ‘Greenback’ recently.
The more hawkish than expected tone struck by the Federal Reserve also sent the US Dollar soaring, with investors now expecting as many as five rate hikes in 2022 and a more aggressive tightening of the Fed’s balance sheet.
However, the US Dollar’s bullish run has cooled today as investors await high-impact US data releases through this week.
The ISM manufacturing PMI will be the first significant release, with forecasts suggesting the sector will experience its slowest rate of growth in a year.
Forecasts for the ISM non-manufacturing PMI suggest business activity slowing to an 11-month low, potentially creating headwinds for the US Dollar.
Employment data for the US in January will be the main focus for USD investors. The non farm payrolls figures may provide more evidence that the US job market can withstand the Fed aggressively raise interest rates to combat soaring inflation.
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