Pound US Dollar (GBP/USD) Exchange Rate Volatile as BoE Offers Mixed Messages
Comments from Bank of England (BoE) Governor Mark Carney prompted the Pound to US Dollar (GBP/USD) exchange rate to slide sharply.
Investors were surprised that Carney took a rather less hawkish stance on monetary policy than anticipated, talking down the prospect of a May interest rate hike.
Economists at the Bank of America noted:
‘As hints go, we think it’s as strong as we get. The data justify delay in our view. We have been sceptical of the need for a May hike. We stick with a May hike for now, waiting to see if other rate setters speak. But the 85% market probability on a May hike looks (much) too high now.’
Following on from the week’s relatively poor run of UK data this left Pound (GBP) exchange rates on a generally softer footing on Friday morning.
However, the GBP/USD exchange rate was able to claw back some of its losses after Monetary Policy Committee (MPC) member Michael Saunders indicated that he will still vote in favour of imminent tightening.
Signs of Greater Fed Hawkishness Dent GBP/USD Exchange Rate
The Pound to US Dollar (GBP/USD) exchange rate also came under pressure as a result of comments from Federal Reserve Governor Lael Brainard.
While Brainard is commonly viewed as one of the more dovish Fed policymakers she appeared to adopt a relatively hawkish outlook, noting the danger of rising ‘cyclical pressures’.
This helped to boost bets that the Fed will opt to take a more aggressive pace of monetary tightening over the coming months in order to better combat higher inflationary pressure.
If other Fed policymakers adopt a similarly hawkish tone over the coming days this should keep US Dollar (USD) exchange rates well supported.
With market risk appetite still generally limited by global trade jitters the appeal of the US Dollar naturally improved.
Pound US Dollar Exchange Rate Weakness Forecast on Revised First Quarter UK GDP
As speculation over the odds of an imminent BoE interest rate hike continue the Pound to US Dollar (GBP/USD) exchange rate is likely to see further jitters.
The latest UK public sector net borrowing figure may offer the Pound a rallying point next week, providing there is not a significant build up in new government debt.
Friday’s UK gross domestic product results are likely to provoke additional volatility for GBP exchange rates, as markets look to see whether there have been any revisions to the preliminary data.
If the quarterly growth rate is revised down to 0.3%, in line with forecasts, this is likely to leave the Pound on a weaker footing.
Any signs that the UK economy is losing momentum could encourage further BoE dovishness, giving the Pound to US Dollar (GBP/USD) exchange rate further cause for softness.