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Pound US Dollar Exchange Rate to Plunge on Dovish BoE?

Horse statue in front of Bank of England

GBP/USD Exchange Rate Plummets as Fed Leaves Door Open to Further Hikes

The Pound US Dollar (GBP/USD) exchange rate is crashing as the Federal Reserve raises interest rates by 75bps, exacerbating global recession fears.

At time of writing the GBP/USD exchange rate is around $1.1246, a 1.20% fall from this morning.

Pound (GBP) Loses Ground ahead of BoE Decision

The Pound slid to a two-week low against the US Dollar as the market turns their attention to the Bank of England’s (BoE) highly-anticipated interest rate decision.

Market forecasts are expecting the central bank to raise interest rates to 3%, the highest since 1989. However, murmurings of a smaller rate hike are starting to concern investors, as the threat of a prolonged recession is weighing on the BoE. Considering the central bank’s recent dovish rhetoric, a 0.5% increase could be on the table.

But with inflation remaining sky high, five times higher than the BoE’s target level of 2%, the central bank will be determined to tighten monetary policy. The BoE will be faced with a very difficult decision to hike rates at a time where inflationary pressures continue to squeeze the UK.

Reassurance to the market will be high on the agenda for the BoE, after the disastrous mini-budget saw Sterling collapse. With the fiscal statement from Chancellor Jeremy Hunt being delayed until November 17, the BoE will remain in the dark when it comes to fiscal policy going forward. Shweta Singh, Senior Economist at Cardano, says:

‘If September’s fiscal uncertainty was centred around how loose government policy would become, November’s uncertainty is centred around how tight it is set to become.

‘And, if September’s dilemma for the Bank was that they might not be doing enough tightening, November’s dilemma is that they end up doing too much. It seems therefore that the MPC is still stumbling around in the dark.’

US Dollar (USD) Rallies on Hawkish Fed

Meanwhile, the US Dollar (USD) continues its dominance after recovering its losses that followed immediately after the Fed interest rate decision.

With expectations of another 75bps rate hike, the downside came when the Fed signalled their intentions to slow their pace of policy tightening. Just as the ‘Greenback’ started to slide, Fed Chair Jerome Powell stepped in and reassured investors with hawkish comments. Powell said:

‘We have ways to go when it comes to raising interest rates, and we will ensure financial conditions are tight enough to bring economic activity and inflation down.’

Looking ahead, a flurry of US data releases could see the US Dollar fluctuate. ISM services PMI remains the biggest focus, an expected slowdown in the service sector could dent the ‘Greenback. However, in light of recent better-than-expected data, any improvement could bolster the US Dollar.

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