GBP USD Exchange Rate Nudges Higher Despite Gloomy Economic Outlook

The pound edged above the 1.21 benchmark against the dollar early in the week as investors continued to digest last week’s Bank of England (BoE) rate hike and accompanying comments.

The central bank’s warning that the UK will be plunged into recession in the fourth quarter and not emerge until 2024 has turned investor focus to Friday’s economic growth figures release.

The BoE’s cautionary remarks followed a 50 basis point (bps) interest rate hike to 1.75% – its most significant increase since 1995. Despite being large by the BoE’s standards, its policy tightening pace remains slower than the Federal Reserve.

Former prime minister Gordon Brown said Monday that the BoE was slow to increase borrowing costs. Still, he believes suggestions – including comments from Liz Truss, the frontrunner in the race to become the next PM – that the central bank could be stripped of its independence would be a “mistake”.

Dollar edges lower

The dollar ran out of steam at the start of the week, arresting some of the gains it had made from Friday’s stronger-than-expected US jobs report. The stellar nonfarm payrolls release boosted the dollar, with the data viewed by investors as a sign the Fed could raise interest rates more aggressively.

Investors are now turning their attention to Wednesday’s inflation print for further clues about the Fed’s next steps on its policy path.

Fed Governor Michelle Bowman said on Saturday that she backs more 75 bps hikes at future policy meetings to curb inflation, stating that she supported the FOMC’s decision. She believes that similarly-sized increases should be on the table until the country sees inflation decline in a “consistent, meaningful, and lasting way”. Bowman’s prepared remarks were made at the Kansas Bankers Association event in Colorado.

Looking ahead

The market will closely watch the Gross Domestic Product released by the National Statistics on Friday, which measures the total value of goods and services produced by the UK. It is considered a broad measure of economic activity – a rising trend positively impacts the GBP, while a falling trend is viewed as unfavourable.

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