The Pound rallied against the dollar on expectations that the Federal Reserve could slow the pace of interest rate hikes and a new U.K. Government budget proposal. Earlier last week, minutes from the most recent FOMC meeting indicated that the U.S. central bank could ease the pace of interest rate hikes. The Fed had imposed a total of six interest rate hikes so far in 2022, lifting the interest rates by a total of 375 bps.
A possibility of a 50 bps interest rate hike next month has weighed on the U.S. dollar, and the greenback’s weakness is one of the main factors behind the pound’s 20% jump since hitting an all-time low during the mini-budget debacle in September.
A recovering sterling bodes well for businesses and consumers, and could in turn help push down the rampant inflation driven by food and energy costs. However, despite the recent jump, the pound remains down against its U.S. counterpart this year. Analysts believe that the new U.K. prime minister Rishi Sunak has restored the embattled investor confidence in the country’s financial credibility, mitigating the risk of purchasing sterling-denominated assets.
However, right now there seems to be a conflict in policies in the UK, given that BoE seems pretty persistent in rates hiking while policy makers proposal of billion dollar budget will help to drive rates lower. Given that the budget plan seemed to be a three year plan, do not come into effect until April 2025 so it will have very little effect over the Monetary Policy Committee’s (MPC) three-year forecast horizon, relative to what was assumed in the November monetary policy report. BoE said to continue to “respond forcefully” if the outlook indicates that inflation will persist in the future.
A possibility of a 50 bps interest rate hike next month has weighed on the U.S. dollar, and the greenback’s weakness is one of the main factors behind the pound’s 20% jump since hitting an all-time low during the mini-budget debacle in September.
A recovering sterling bodes well for businesses and consumers, and could in turn help push down the rampant inflation driven by food and energy costs. However, despite the recent jump, the pound remains down against its U.S. counterpart this year. Analysts believe that the new U.K. prime minister Rishi Sunak has restored the embattled investor confidence in the country’s financial credibility, mitigating the risk of purchasing sterling-denominated assets.
However, right now there seems to be a conflict in policies in the UK, given that BoE seems pretty persistent in rates hiking while policy makers proposal of billion dollar budget will help to drive rates lower. Given that the budget plan seemed to be a three year plan, do not come into effect until April 2025 so it will have very little effect over the Monetary Policy Committee’s (MPC) three-year forecast horizon, relative to what was assumed in the November monetary policy report. BoE said to continue to “respond forcefully” if the outlook indicates that inflation will persist in the future.