GBP/USD Exchange Rate Slips as BoE Raises Interest Rates to 15-Year High
The Pound US Dollar (GBP/USD) exchange rate is tumbling as the Bank of England (BoE) met expectations and hiked the interest rates to 5.25%.
At time of writing the GBP/USD exchange rate is around $1.2667, a 0.43% fall from this morning.
Pound (GBP) Sinks amid 14th Straight Hike from BoE
The Pound (GBP) is struggling for demand today in the wake of the central bank meeting market expectations and raising the interest rates to a fresh 15-year high of 5.25%. However, a 6-2 split over the size of the hike, and its policy statement reiterated the central bank’s commitment to stay ‘sufficiently restrictive for sufficiently long’ in order to return to the target of 2%.
With many economists expecting a chunkier 50bps hike, the more dovish of the two is sapping demand. With inflationary pressures in the UK the highest amongst the G7 economies, UK households will be strained even further on soaring borrowing costs. Furthermore, fears of a deep recession could also be weighing heavily as the BoE warned that interest rates will remain high for at least two more years.
Looking ahead, the markets will continue to digest the latest interest rate decision. With the accompanying statement and press conference, concerns over the UK economy appear to be weighing heavy and could see Sterling struggle further.
US Dollar (USD) Soars on Sombre Sentiment
Meanwhile, the US Dollar (USD) continues its momentum as a downbeat market mood propelled safe-haven flows. The US Index remained close to four-week highs as fears over global growth slowdown and recessions spooked investors.
However, with the downgrade to the US government’s credit rating from Fitch yesterday, USD investors are still wary of the US economy. Chris Turner, economist at ING, said of the situation:
‘Despite the Democrat administration and its supporters in the media decrying Fitch’s decision to remove the sovereign’s AAA status on Tuesday evening, there is genuine concern over US fiscal dynamics. And it looks like the Fitch release was carefully timed.’
Looking ahead, the latest ISM services PMI is set to print. Despite an expected softening from 53.9 to 53, June’s figure recorded the strongest growth in the service sector in four months. Remaining in expansion territory, a strong service sector could keep the US Dollar supported.