The Pound US Dollar exchange rate plunged on Thursday, shedding all of its gains since Monday as investors reacted to the Bank of England’s (BoE) dovish interest rate hike.
GBP USD opened the week at the level of 1.3128 and was trending near a high of 1.3311 on Thursday morning, before plummeting back down to 1.31 again in the afternoon.
Pound (GBP) Plummets on Bank of England (BoE) News
Despite the Bank of England (BoE) voting to hike UK interest rates for the first time since 2007, the Pound plummeted across the board on Thursday.
The Bank of England confirmed that it would be raising UK interest rates from the record-low of 0.25% back up to 0.50%. This essentially wound back the rate cut seen following the Brexit vote in 2016.
Typically a rate hike would be cause for markets to buy the Pound. However, hawkish investors were highly disappointed by the bank’s longer-term outlook for monetary policy.
The BoE heavily indicated that it still only expects UK interest rates will rise slightly and gradually over the coming years, essentially meaning this is not the beginning of a rate hike cycle. According to the bank itself;
‘The MPC now judges it appropriate to tighten modestly the stance of monetary policy in order to return inflation sustainably to target.
All members agree that any future increases in Bank Rate will be at a gradual pace and to a limited extent’
Hawkish investors hoping for a UK rate hike cycle were highly disappointed and sold the Pound. This also means that the Pound outlook is much lower than it would have been if the bank had indeed hinted at future hikes.
BoE Governor Mark Carney followed the bank’s announcements with a press conference, in which he was generally dovish and issued repeated warnings about the Brexit process and the potential damage it could cause Britain’s economy.
The Pound could see slightly better performance if Friday’s services PMI from Markit beats expectations, but otherwise its strength could be limited in the coming week.
US Dollar (USD) Sturdy as Fed Rate Hike Bets Firm
Markets are now very confident indeed that the Federal Reserve will hike US interest rates in December, making it the third 2017 interest rate hike and fulfilling the forecasts the Fed made at the beginning of the year.
In its November policy decision, the Federal Open Market Committee (FOMC) left monetary policy frozen as expected, and indicated that the door was open for a rate hike in December.
Bets of a December interest rate hike from the Fed are now at over 95% and reached as high as 98% at one point on Thursday afternoon.
Still, most of today’s GBP USD losses were due to Bank of England (BoE) disappointment, with US Dollar movement still limited ahead of Thursday’s Fed Chair announcement.
US President Donald Trump is expected to announce his pick to replace Federal Reserve Chairwoman Janet Yellen when her term ends in early 2018.
Markets currently widely expect that Trump will announce Fed Governor Jerome Powell as Yellen’s replacement. As Powell is relatively dovish like Yellen, his appointment would not notably change the US Dollar outlook.
Still, investors would appreciate the drop in Fed uncertainty.
Friday’s key US Non-Farm Payroll report from October could also influence the US Dollar. If US job data is much better-than-expected, it may boost speculation that the Fed could continue to hike US interest rates further in 2018.
GBP USD Interbank Rate
At the time of writing this article, the Pound US Dollar exchange rate trended in the region of 1.3108. The US Dollar to Pound exchange rate traded at around 0.7630.
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