Sterling Drops Following Dovish BoE Pivot
When the Bank of England (BoE) issued its most recent interest rate decision on Thursday, the Pound Sterling experienced a significant setback. The GBP lost substantial ground versus most of its currency rivals as a result of the central bank’s dovish tilt.
BoE Increases Rates by 50 Basis Points, but Backs Off Hawkish Phrases
The Monetary Policy Committee voted 7-2 in support of the rate increase as the Bank of England hiked interest rates by 50 basis points to 4%. In its post-decision statement, the central bank also softened its previously aggressive position by excluding references to “forceful” rate increases. In March, analysts anticipate at least one more rate increase of 25 basis points.
Forecasts for weak growth weigh on the pound sterling.
The Bank of England predicted a 0.5% decrease in 2023, which was similar to the dismal estimate provided earlier in the week by the International Monetary Fund, which served to accentuate the Pound’s downward trajectory. The central bank, however, suggested that the UK’s recession could be less than initially anticipated.
Due to an unexpected drop in jobless claims, the US dollar gains strength.
As market sentiment remained cautious and in favor of the safe-haven currency, the U.S. Dollar regained strength. An unexpected drop in unemployment claims, which indicated a continuing tight labor market despite the Fed’s assistance and strengthened betting on more rate rises, helped the dollar.
Future of the GBP/USD Exchange Rate: UK Service Sector Recession and Political Uncertainty
The final reading of the January services sector PMI, which is anticipated to indicate a contraction in the UK’s dominant private sector, might have an effect on the Pound Sterling for the remainder of the week. Any further indications of political unrest can potentially have an impact on the currency.
In the event that Friday’s jobs report reveals a slowing labor market, the U.S. Dollar may be forced lower. The anticipated rise in the unemployment rate for January and the decline in non-farm payrolls would be consistent with the Federal Reserve’s predictions of a downturn in the U.S. labor market. If the most recent ISM non-manufacturing PMI prints as predicted, it might minimize any losses for the US dollar, with January’s PMI for the US services sector projected to rebound from December’s poor reading.