Pound US Dollar (GBP/USD) Exchange Rate Rallies amid Elevated BoE Rate Hike Bets

April 26, 2023 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Rallies amid Elevated BoE Rate Hike Bets

Pound US Dollar (GBP/USD) Exchange Rate Rallies amid Elevated BoE Rate Hike Bets

The Pound US Dollar (GBP/USD) climbed during Wednesday’s European session, as elevated rate hike bets supported the Pound against its peers.

Furthermore, a return of risk appetite to the markets weighed heavily on the safe haven ‘Greenback’, preventing it from making many gains.

At the time of writing, GBP/USD traded at around US$1.2485, a rise of roughly 0.6% from Wednesday’s opening rates.

Pound (GBP) Rallies amid Elevated BoE Rate Hike Bets

The Pound (GBP) strengthened against most peers during Wednesday’s trade, as elevated rate hike bets coalesced with a return of risk appetite to support Sterling.

Due to the Pound’s increasingly risk sensitive nature, these improvements in market mood serve to support Sterling against safer currencies, such as the US Dollar.

Furthermore, persistently elevated interest rate hike bets likely contributed tailwinds to GBP. With inflationary pressures easing somewhat, investors moved to price in an interest rate hike from the Bank of England (BoE) during May’s meeting.

Similarly, as the UK consumer price index remains far beyond the BoE’s target rate, investors had begun to consider potential for further rate hikes beyond the May meeting.

However, an element of trading against other currency dynamics may have played a role. With a lack of significant data releases during Wednesday’s session, weakness in other currencies could have brought support to Sterling.

US Dollar (USD) Drops amid Cheery Trade

The US Dollar (USD) weakened during Wednesday’s European session, as a recovery in risk appetite amongst traders weighed on the safe haven currency.

Fresh fears over the stability of the US banking sector appeared to prompt a slight pullback in Federal Reserve rate hike bets.

Shares in First Republic Bank had plummeted by around 50% during Tuesday’s session, after they reported a worrisome decline in deposits. They reported that customers had withdrawn significant amounts of money during the turmoil which rocked the US banking sector in March.

With the prospect of less tightening, fears that damage to the US economy could affect global growth in the tail end of 2023 appeared to recede. However, these same jitters could have tempered the market mood.

As the US economy is in something of a precarious position, the current blackout period the Federal Reserve is undertaking could have added to USD’s woes on Wednesday. As the lack of communication engenders a lack of clarity, USD investors may have been unwilling to invest in the ‘Greenback’.

As such, investors elected to support more risk sensitive assets during Wednesday’s session, with the ‘Greenback’ unable to gain ground against most peers.

Pound US Dollar (GBP/USD) Exchange Rate Forecast: US GDP Data in Focus

Looking ahead for the US Dollar (USD), the core catalyst of movement is likely to come from Thursday’s publication of first quarter GDP data.

The US economy is forecast by analysts to have grown by 2%. While positive, these predictions point to a slowdown in economic growth, which could prove worrisome for investors.

Furthermore, the economic slowdown could point to signs that the Federal Reserve’s tightening campaign has begun to take effect. As such, this could weigh on the ‘Greenback’ by leading USD investors pare back their expectations of further rate hikes from the Fed.

On Friday, the Fed’s preferred gauge of inflation – the yearly core PCE price index – is scheduled to print. March’s data is forecast to cool from 4.6% to 4.5%.

If this data prints accurately, or even cools further, it may weigh on the US Dollar by indicating that inflation is beginning to fall in the US. However, as it remains relatively sticky, it could spark further rate hike bets as it remains above the Fed’s target rate.

The Pound (GBP), however, is expected to see very little in the way of significant data releases through to the end of the week’s session.

Because of this, Sterling may be left vulnerable to shifts in risk appetite. As an increasingly risk sensitive currency, a shift towards more upbeat trade could lift the Pound above the safe haven ‘Greenback’.

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TAGS: American Dollar Forecasts Pound Dollar Forecasts Pound Sterling Forecasts