Pound US Dollar Exchange Rate Plunges O Hawkish FED

The Pound US Dollar (GBP/USD) exchange rate plummeted beyond a two-week low as the Bank of England (BoE) raised interest rates to 3%.

At time of writing the GBP/USD traded around $1.1211, a 1.51% fall from this morning’s opening levels.

Pound (GBP) Exchange Rates Crash as BoE Hiked Interest Rates by 75bps

The Pound (GBP) plummeted after the BoE announced it has raised interest rates to 3%, the highest since 2008. With market expectations of a 75bps rate hike being met, the increase is the biggest in over 33 years. Despite meeting expectations, the BoE also warned that the UK is already in recession.

Further dampening moods, and Sterling, is that the BoE states that the UK is currently in a recession and warns of a prolonged one. With borrowing costs now close to a 40-year high, the bank projects a long, shallow recession, with a much slower recovery than the 80s or 90s. Unemployment is expected to rise, and predictions of the rate hitting 6.5% by late 2025. The BoE stated:

‘The MPC’s latest projections described a very challenging outlook for the UK economy. It was expected to be in recession for a prolonged period and CPI inflation would remain elevated at over 10% in the near term.’

As the central bank continues its battle against raging inflation, the move to calm inflationary pressures did little to appease investors who remain cautious about the UK economy. Matching the interest rate raises by both the Fed and the European Central Bank (ECB), the BoE have blamed the soaring energy prices and a tight labor market for the decision.

Responding to the 75bps rate hike, Chancellor Jeremy Hunt said that the BoE took their decision in line with their goal of returning inflation down to target. With the fiscal statement not due until 17 November, GBP investors will be waiting with bated breath over how the government intends to tackle the cost-of-living crisis and the spiraling public debt. He added:

‘The government’s number one priority is to grip inflation. There are no easy options, and we will need to make difficult decisions on tax and spending.’

US Dollar (USD) Exchange Rates Surge on Hawkish Fed

Meanwhile, the US Dollar (USD) rallied after suffering substantial losses in the wake of the Fed raised interest rates by 75bps and recovered to a fresh two-week high.

Expectations of a 0.75% rise were met but signals of slowing monetary policy capped any meaningful gains. A dovish turn from the usually hawkish Fed soured investors’ moods. Before the ‘Greenback’ could slide any further, Fed Chair Jerome Powell reassured the market with saying that inflation remains too high, and added:

‘We have ways to go when it comes to raising interest rates, and we will ensure financial conditions are tight enough to bring economic activity and inflation down.’

Elsewhere, crucial labor data helped support the US Dollar as initial jobless claims came in lower than expected. Meanwhile, despite a continued contraction in the service sector, the S&P global services PMI came in above market forecasts.

GBP/USD Exchange Rate Forecast: BoE Speech to Boost the Pound?

Looking ahead, the Pound US Dollar exchange rate could see further movement when BoE MPC Member Catherine Mann is set to speak later on Thursday. Any further hints at monetary policy could provide a lifeline for the flagging Sterling.

Elsewhere, further employment data could buoy the US Dollar if forecasts prove accurate. Both non-farm payrolls and unemployment rate are expected to print positively, potentially bolstering the ‘Greenback’.