GBP/USD Exchange Rate to be Affected by Interest Rate Hike?
The Pound US Dollar (GBP/USD) exchange rate is currently trending down following yesterday’s hawkish decision from the Federal Reserve Bank. The Bank of England (BoE) is expected to hike interest rates by a smaller amount, which will likely prompt markets to compare the two banks’ approaches.
At the time of writing, GBP/USD is trading at $1.2138, down 0.3% from today’s opening levels.
Pound (GBP) Weakens as Investors Turn Bearish
The Pound (GBP) is tumbling against the majority of its peers today as Sterling investors are hesitant to place bullish bets ahead of the Bank of England’s interest rate decision at midday.
The UK’s central bank is expected to hike rates by 25bps, erring on the side of caution amid volatility in financial markets. With inflation remaining a major issue across most Western nations, economists have expressed fears that aggressive policy tightening action from central banks may trigger a global recession.
These fears may be compounded by weak retail statistics currently emerging, and the retreat of European markets. Chris Beauchamp, chief market analyst at IG Group, says growth worries are pushing markets down:
‘It hasn’t taken long for the post-Fed bounce in stocks to fade, and given the gloomier outlook for growth that is hardly surprising… growth is slowing, earnings are still falling and prices keep on rising.’
Nevertheless, there are some who believe the BoE could hike rates by a larger percentage. Conall MacCoille, chief economist at wealth managers Davy notes:
‘CPI inflation at 9% and a tight labour market are creating a risk that employee price expectations could become entrenched.
[Furthermore], The MPC’s vote was split 6-3 in May, with the minority favouring a 50bps rise in interest rates.’
US Dollar (USD) to Find Support on Comparative Hawkishness?
The US Dollar (USD) is enjoying upside this morning as a risk-off market mood draws support towards the risk-off currency.
Also buoying the ‘Greenback’ are Fed-inspired tailwinds as the US central bank hiked interest rates yesterday by 0.75%. Defending the decision, the bank said:
‘The invasion and related events are creating additional upward pressure on inflation and are weighing on global economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks.’
While such a move exacerbates recession fears, this serves to increase USD support as traders move to invest in safe-haven assets.
Later today, initial jobless claims could have some effect on ‘Greenback’ exchange rates; if claims reduced to 215K last week as predicted, USD may enjoy further support.