The pound ended July about 0.1% down against the dollar, extending a disappointing run this year, posting just one month of marginal gains in May. Since January, the UK currency racked up a 10.1% loss amid a faltering economy, soaring interest rates and domestic political uncertainty – a trend that will likely continue.
It was a month of two halves of contrasting fortune for GBP USD. By the middle of July, the pair pulled below 1.18, its weakest since March 2020, due to regular bouts of risk aversion and turmoil in the Conservative Party.
The pair embarked on a march higher through to the end of the month. In particular, policy tightening across the pond – and dovish rhetoric from the Fed fuelled this trend.
Interest rate announcement in focus for the pound
The Bank of England (BoE) Monetary Policy Committee voted to increase its base rate to 1.25% from 1% in June. This was the latest move in the central bank’s steady hiking cycle, leaving it in the slow lane compared to its US contemporary.
The US Federal Reserve hiked interest rates by three-quarters of a percentage point in July – its second supersized increase in just over a month – to 2.5%, crushing inflation. The question on investors’ lips is will the BoE follow suit in August to bring inflation back to its 2% target?
They don’t have to wait long to find out, with the central bank’s policy announcement scheduled for 4 August when the latest meeting of rate-setters concludes. A potential half a percentage point move has been signalled by BoE governor Andrew Bailey, which would mark its most significant increase since 1995 – and could boost the pound.
As the race between former Chancellor Rishi Sunak and Foreign Secretary Liz Truss enters its final weeks, investors will continue assessing their wildly different economic ideologies – and the potential impact on the pound.
GDP data in focus for the dollar
If the BoE issues its most significant rate increase in nearly 30 years, market analysts believe it could knock the dollar down to an almost two-month low against the UK currency.
The dollar is also vulnerable to sluggish economic reports after a recent US gross domestic product (GDP) report showed economic activity shrank by 0.9% in the second quarter. The weak data put the domestic economy on course for a technical recession and brings the next GDP reading on 25 July into sharp focus for investors in the dollar.
US inflation quickened to 9.1% in June – a fresh four-decade high – after the consumer price index (CPI) climbed 1.3% from May, the largest increase since 2005. This increased pressure on the Fed to aggressively raise interest rates, despite the threat to economic expansion – and they duly obliged. The following Fed policy announcement doesn’t take place until September, but the CPI reading for July – due on 10 August – will impact its outcome.
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