The GBP/USD pair has reached a fresh two-week high as there are signs that the Bank of England (BoE) will raise interest rates further. GBP/USD struggled earlier on Wednesday to post any gains and remained directionless around its five-week high after the release of mixed UK data.
While UK GDP improved in April, Manufacturing and Industrial Production disappointed investors.
Market participants are reviewing UK economic indicators so they can make better projections about the Bank of England’s (BoE) interest rate policy. The increasing likelihood of a BoE rate hike versus the Federal Reserve’s (Fed) pause has boosted the confidence of pound buyers.
If Fed policymakers abandon calls for additional rate hikes and reassess their economic forecasts, then the GBP/USD could strengthen. All eyes are on Powell’s upcoming speech.
Bank of England expectations for further rate hikes
BoE policymakers are concerned about inflationary pressures in the UK, as food inflation and severe labour shortages persist. Inflation is now four times higher than the 2% target rate, while the lack of any evidence showing a slowdown in inflation further strengthens the case for further interest rate hikes by the BoE.
Pound initially fails to react to UK data
GBP/USD had ignored the mixed UK data and remained sidelined earlier on Wednesday. Analysts noted that the reason for this was the cautious market mood ahead of the Federal Open Market Committee (FOMC) monetary policy meeting as well as the inconsistency in the data and concerns about the UK’s economic strength.
Gross Domestic Product (GDP) for April rose 0.2% month on month while Industrial Production dropped in April. Eight of the 13 sub-sectors within UK manufacturing contracted in April.
Despite the disappointing UK data, investors are bullish about the GBP/USD pair due to previously reported data such as positive employment and inflation numbers. Additionally, indications from the Bank of England (BoE) support the case of further interest rate hikes.
From the US, weak US inflation numbers for May have pushed the greenback lower and offered support to the pound. While the Cable remains steady, after a bounce yesterday, it could rise higher.
Fed policy decision later today
All eyes now turn on the key central bank event that will influence the Cable. The Fed will announce its monetary policy decision later during the US session, at 18:00 GMT and is expected to remain on hold. Apart from this, market participants will closely analyse Fed Chair Jerome Powell’s comments at the post-meting press conference for any signs about the bank’s intentions.
Wall Street investors, who were anticipating the Fed to begin cutting rates in the coming months, are now expecting the Fed to keep costs high for the rest of the year, due to a tight job market and persistently high inflation. The strength of the economy has surprised Fed officials who believe that the very high borrowing costs could hurt economic growth but, at the same time, are not confident enough to put a stop to further rate hikes.
The Fed has raised rates 10 times in a row, but the labour market, home prices and consumer spending are all growing, while inflation is going down slowly.