The Pound US Dollar (GBP/USD) exchange rate steadily fell over the course of last week. A poor outlook for the UK economy and concerns over Prime Minister Boris Johnson’s leadership weighed on the currency pair. A hawkish outlook from the Federal Reserve also likely kept pressure on the exchange rate over the past week.
Following Monday’s vote of no confidence in UK PM Johnson, GBP/USD managed to recover some gains with markets hopeful that it could lead to some political stability in the UK. Additionally, Tuesday’s narrowing of the US trade deficit may have also weakened the currency pair.
An unexpected above-forecast rise to US inflation on Friday likely also pulled the exchange rate lower. The figures also increased expectations that the Fed would hike rates next week.
Pound (GBP) Exchange Rates Drop as Johnson Wins No Confidence Vote
The Pound (GBP) tumbled lower against its rivals last week. The currency began the week amid political uncertainty as PM Boris Johnson faced a vote of no confidence. The Pound dropped ahead of the vote.
Johnson won the vote on Monday evening, although 148 Conservative MPs rebelled against the prime minister. Investors had been hoping that the vote would help Sterling to shed some of its uncertainty which may explain some of the gains GBP made on Tuesday. An upward revision to the country’s services PMI could also have helped to bolster the currency.
Pessimistic forecasts for the UK economy throughout last week also kept the Pound suppressed. Predictions from the British Chambers of Commerce (BCC) outlined how the UK’s economy will ‘grind to a halt’ in 2022, before drastically contracting.
Reports from the Bank of England (BoE) also indicated that household inflation expectations are at their highest level since 1999.
US Dollar (USD) Exchange Rates Climb as Inflation Remains High
The US Dollar (USD) made steady upward progress last week. Investors remained convinced that next week’s interest rate decision from the Fed would bring a 0.5% rate hike. Hawkish comments from multiple Fed policymakers reinforced views that a series of sustained rate hike was also distinctly possible.
A contraction to the US trade deficit boosted the US Dollar higher on Tuesday. The deficit narrowed by the largest amount on record as imports fell amid China’s Covid-19 lockdowns.
The week ended with multiple data releases that reinforced the market’s rate hike expectations. On Thursday, robust jobless figures indicated a continually tight labour market increasing the case for Fed action.
Friday’s unexpected and above-forecast inflation figures also increased pressure on the Federal Reserve to act, and reversed speculation earlier in the week that inflationary pressures could ease. The rise was driven by record high petrol prices, as well as businesses in the services sector having to pass on rising costs to customers.
GBP/USD Exchange Rate Forecast: Will BoE Raise Rates as Forecast
Looking to the coming week for the Pound (GBP), an uptick to April’s GDP figures on Monday could help boost the currency. The figures may make little impact when coming up against the UK’s overall dreary outlook.
UK unemployment figures on Tuesday may also help to bolster the Pound if the country’s labour market remains tight. Investors will be most keenly awaiting the BoE’s interest rate decision on Thursday, however. A 0.25% rise as forecast could push the currency higher, although fears that aggressive rate hikes could push the UK into a recession may limit gains.
For the US Dollar (USD), officials at the Fed will be looking to PPI figures on Tuesday for indications of inflationary pressures. If the figures rise as forecast then it could push USD higher amid Fed rate hike bets.
Bets could be limited ahead of Thursday’s interest rate decision from the Fed, however. The central bank is expected to continue with 0.5% rate hikes in the coming months unless inflation begins to ease. A rate hike could see the US Dollar if it meets market expectations.