GBP/USD Exchange Rate Rises on Forecast August BoE Interest Rate Hike

June 22, 2018 – Written by Ben Hughes

On Thursday, the Pound to US Dollar exchange rate opened in the region of 1.3173 and closed higher around 1.3247.

This appreciation was thanks to the Bank of England (BoE) Monetary Policy Committee (MPC) meeting, which brought a pleasant surprise for GBP traders.

It was revealed that although a majority of policymakers had voted for no change to interest rates again, formerly cautious official Andy Haldane had backed an interest rate hike.

This split the MPC 3-6 and led a number of economists to predict that an August interest rate hike was now likely.

Among those forecasting a near-term rate hike was OANDA’s Craig Erlam:

‘Prior to today’s meeting, investors were unconvinced by the prospect of a rate hike in August but I think today’s release will change that.

‘While a hike in November makes more sense as there’ll be more clarity – hopefully – by then, I wouldn’t be surprised if they go in August given the criticism they endured for holding off in May.’

Despite some analysts considering an August rate hike to be a done deal, Silvia Dall’Angelo of Hermes Investment Management was more sceptical:

‘The BoE seems determined to deliver one more hike in the second half of the year, justified by a tight labour market and an economy now working close to potential.

‘However, there are several reasons to err on the side of caution. In particular, recent hard data on industrial production and surveys on economic activity suggest that the prospects of a significant rebound in economic performance are uncertain following a weak Q1.

‘Moreover, risks of a disruptive Brexit event down the road are still high. Negotiations have stalled in recent months and the upcoming EU council at the end of June is unlikely to deliver any progress, as other issues (not least international trade tensions) are now topping the EU leaders’ agenda.’

Further supporting yesterday’s GBP/USD exchange rate rise, there was disappointing US manufacturing data from the Philadelphia branch of the Federal Reserve.

June’s manufacturing index showed a decline from 34.4 points to 19.9, while a smaller dip to 28.9 points had been forecast.

GBP/USD Exchange Rate Up 0.5% on Continued Support from BoE Rate Hike Forecast

Because it represents a potential sea change in monetary policy, yesterday’s BoE news has continued to fuel today’s Pound to US Dollar (GBP/USD) exchange rate gains.

The BoE has been in the headlines again today because of increased powers granted by Chancellor Philip Hammond.

In preparation for any potential economic turbulence caused by the UK’s eventual exit of the EU, the BoE has been granted the ability to lend hundreds of billions of Pounds to struggling sectors.

Commenting on the boost to the BoE, Governor Mark Carney said:

‘Today marks a step change in our ability to provide the liquidity that the new finance may eventually require … we now have a balance sheet fit for purpose.

[It] that reflects the Bank’s much wider range of responsibilities including banking supervision, macro-prudential policy and resolution.’

Ideally the BoE won’t need to use these extraordinary powers, but the fact that such a contingency measure has been set up might have added to the sense of reassurance among Pound traders today.

USD/GBP Exchange Rate Drops as EU Tariffs Hit US Goods

The US Dollar (USD) has been in low demand today, falling against the Pound (GBP) and a number of other currency peers.

This deterioration follows the imposition of EU tariffs against a number of US goods imports, as part of an escalating trade war.

This has come from US President Donald Trump’s protectionist policies, which have led to tariffs and counter tariffs being imposed against Canada, the EU and China.

Although the tariffs are by no means expected to cripple the US economy, they still represent a significant deterioration in relations between two of the world’s largest economies.

Pound Sterling to US Dollar Exchange Rate Forecast: Is GBP/USD Volatility ahead on GDP Data?

The next major UK economic data to watch out for will come late next week, on Friday.

This will be finalised GDP growth rate figures for Q1 2018, which are expected to confirm a slowdown on the quarter and the year.

Falling levels of economic growth are forecast because of a slow start to the year, but an official confirmation may still devalue the Pound.

As with the UK, there will be US GDP stats to watch out for in the coming week.

The US readings will be out a day earlier on Thursday, but like the UK a slowdown in Q1 2018 has been forecast.

Such results could lead to GBP/USD exchange rate gains late next week, but as mentioned above losses are probable if the UK’s stats also disappoint.

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TAGS: Pound Dollar Forecasts