Pound US Dollar (GBP/USD) Exchange Rate Extends Rebound
The Pound US Dollar (GBP/USD) exchange rate is extending this week’s gains on Wednesday ahead of the Bank of England (BoE) monetary policy meeting and interest rate decision.
GBP/USD has strengthened a cent and a half since the session opened on Monday to trade around $1.3560 today as markets expect the BoE to hike interest rates tomorrow, and falling US Treasury yields weaken the US Dollar.
Pound (GBP) Buoyed by BoE Rate Hike Expectations
The Pound (GBP) is making gains again today as markets anticipate the BoE monetary policy committee raising interest rates to 0.5% from 0.25% at tomorrow’s meeting.
While many investors have already priced in a rate hike tomorrow, the Pound appears to be receiving additional support from expectations of more monetary policy tightening through 2022.
A rise in interest rates to 0.5% may signal to investors that the BoE will also begin considering quantitative tightening.
The central bank holds assets of £875 billion that it used to help support the UK economy through the pandemic, and now with signs of recovery in the UK economy may reduce the government bonds it holds.
Markets will also look to the BoE’s forward guidance following tomorrow’s meeting, with investors assessing insight into how many rate hikes there will be through 2022.
Meanwhile, ongoing uncertainty over the future of UK Prime Minister Boris Johnson may stoke volatility in GBP exchange rates.
While the police investigation continues into Downing Street lockdown breaches, increasing calls for Johnson to resign may weigh on Sterling sentiment.
The possibility of Conservative MPs forcing a leadership contest through a vote of no confidence also appears to be growing, after another senior MP, Tobias Ellwood, publicly declared he submitted a letter of no confidence in Boris Johnson.
US Dollar (USD) Slips as Treasury Yields Weaken
The US Dollar (USD) continues to come under significant pressure today, giving up last week’s gains.
USD exchanges rates have moved in line with US Treasury yields, which have fallen following comments from several Federal Reserve policymakers that cooled concerns over more aggressive than previously thought monetary policy tightening from the US central bank.
Some Fed officials have taken a more cautious tone than that of Jerome Powell last week, with San Francisco Fed President Mary Daly saying:
“We definitely are poised for a March increase (of interest rates).
“But after that, I want to see what the data brings us … let’s get through Omicron, let’s look at this and let’s see.”
Meanwhile, ADP employment change data for January may provide an indication of what to expect in the non farm payrolls report released on Friday.
With forecasts pointing to disappointing job growth in both data releases, the US Dollar may slip slightly as investors may adjust their positions due to a weaker job market suggesting the Fed may not tightening monetary policy as aggressively as previously thought.
The release of the ISM non-manufacturing PMI tomorrow may also dent the US Dollar, with business activity in the service sector expected to have slowed in January.
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