Pound US Dollar (GBP/USD) Exchange Rate Soars as US Rate Hike Bets Slip

November 15, 2022 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Soars as US Rate Hike Bets Slip

Pound US Dollar (GBP/USD) Exchange Rate Soars as US Rate Hike Bets Diminish

The Pound US Dollar (GBP/USD) exchange rate strengthened on Tuesday, as USD investors lowered their expectations of higher rate hikes from the Federal Reserve.

The shift in view saw GBP/USD soar to around US$1.1874 at the time of writing, a marked jump of 1% from Tuesday’s opening rates.

US Dollar (USD) Spirals as Investors Adjust Fed Rate Hike Bets

The US Dollar (USD) plummeted on Tuesday against all major peers, as investors began to reprice the ‘Greenback’ following dovish comments from Federal Reserve policymakers.

While Christopher Waller, the Governor for the Fed, indicated over the weekend that the Central Bank may begin to slow their tightening measures as soon as December, he did attempt to outline the Fed’s desire to curtail inflation without denting the US economy too significantly.

This was then compounded on Monday as Fed Vice Chair Lael Brainard signalled that the Bank would soon begin slowing the pace of rate hikes, causing USD to sink.

Vice Chair Brainard stated: ‘I think it will probably be appropriate soon to move to a slower pace of increases, but I think what’s really important to emphasize is... we have additional work to do. It's really going to be an exercise on watching the data carefully and trying to assess how much restraint there is and how much additional restraint is going to be necessary, and sustained for how long, and those are the kinds of judgments that lie ahead for us.’

With Tuesday’s PPI data for October expected to show little change, investors have begun to expect softer hikes over the next months.

Furthermore, a risk-positive market mood also drew investors away from the safe-haven ‘Greenback’ on Tuesday, as investors sought riskier ventures.

Pound (GBP) Rallies as Wage Growth Exceeds Expectations

The Pound (GBP) strengthened against most peers on Tuesday, as wage growth came in above expectations and countered an uptick in unemployment.

The UK Office for National Statistics reported that the Average Earnings (excluding bonuses) figures rose from 5.5% to 5.7%, beyond the forecast of 5.6%. As the figures remain below inflation, they added to pressure on the Bank of England (BoE) to increase interest rates, thus prompting rate hike bets to increase and support Sterling.

Ashley Webb, UK Economist at Capital Economics explained this further. He stated: ‘Overall, while today’s release provided some tentative signs that the labour market is turning, the Bank of England will want to see concrete signs of easing wage growth. That’s why we think the Bank of England will raise interest rates by 50 basis points in December and eventually to a peak of 5.00%, although the fiscal consolidation set to be announced on Thursday means the risks are on the downside.’

The continuing gap between inflation and wages is likely to weigh heavily on GBP investors as the UK continues to slide into a recession.

Pound US Dollar Exchange Rate (GBP/USD) Forecast: Autumn Statement to Buoy Sterling?

Looking ahead for the Pound US Dollar exchange rate, the core catalyst of movement may be the upcoming Autumn Statement from the UK government.

Due on Thursday, the Autumn Statement will outline the government’s fiscal plan for the following year, with a handful of longer term aims. With a raft of spending cuts and tax hikes expected, the Autumn Statement is expected to be austerity based.

The return to fiscal orthodoxy may further soothe investors after the recent market and political chaos, but any deep spending cuts may cap these gains as investors remain focused on the cost-of-living crisis gripping the UK.

For the US, Wednesday brings October’s Retail Sales data. A jump from 0% to 1% is forecast, which may serve to boost the ‘Greenback’ by demonstrating a strong US economy. However, as the session continues it may increase the market mood, and end up muting USD.

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TAGS: Pound Dollar Forecasts