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Pound US Dollar Exchange Rate to Sink on Hawkish Fed?

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GBP/USD Exchange Rate Rallies Ahead of Central Bank Rate Hikes

The Pound US Dollar (GBP/USD) exchange rate is strengthening as markets brace for 75bps interest rate hikes from both the Bank of England (BoE) and the Federal Reserve.

At time of writing the GBP/USD exchange rate is around $1.1546, a 0.69% fall from this morning.

Pound (GBP) Climbs Despite Contracting Manufacturing PMI

The Pound is enjoying relative success against most of its peers today despite manufacturing PMI shrinking at fastest rate since May 2020.

October’s PMI printed at 46.2, falling from 48.4, highlighted widespread recession fears and unrelenting inflationary pressures. The fourth consecutive month of contraction, also pointed to the sharpest drop in new orders. The decline in orders was at the fastest pace since the height of the Covid pandemic. The UK now joins the global disruption in factory output, as recession fears grow amid high inflation and continued Covid disruptions.

Meanwhile, Prime Minister Rishi Sunak is set to announce a series of tax hikes as the UK government attempts to repair the damage from the disastrous mini-budget. After the market meltdown caused by Liz Truss’ mini-budget, Sunak and Chancellor Jeremy Hunt hope to plug the £50bn fiscal hole left behind. Sweeping tax hikes across the board could see the cost-of-living crisis worsen.

Looking ahead, the BoE is set to announce their interest rate decision on Thursday. Expectations are growing of another 75bps rate hike, which has seen Sterling rise considerably. With the UK on the cusp of a recession, the central bank continues its battle to rein in inflation.

US Dollar (USD) Muted ahead of Fed Interest Rate Decision

Meanwhile, the US Dollar (USD) remains fairly quiet ahead of the crucial Fed rate hike decision tomorrow. Another bumper hike of 75bps could see the interest rate hit 4%, and the ‘Greenback’ could see a welcome boost.

Looking ahead, before the key interest rate decision tomorrow, manufacturing PMI and JOLTs job openings for September could see the ‘Greenback’ fluctuate. A weakening demand and slightly improving supply chain issues could see the PMI remain at 50, signs of a stagnating sector.

Meanwhile, the JOLTs job opening survey could reveal a cooling labour market as job openings are expected to have fallen below 10 million for the first time since mid-2021. Further indication of the US economy slowing could dent the US Dollar, but a continued resilience could see it climb ahead of the Fed decision tomorrow.

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