GBP USD Exchange Rate: The Week Ahead October 18th

GBP USD Weighed Down by Omicron-Fuelled Rate Concerns

The pound continued its march higher on Friday, achieving its biggest weekly gain against the dollar since May. A combination of dollar weakness and mounting expectations that the Bank of England (BoE) will hike rates this year fuelled the upward movement.

The GBP USD rate was as high as 1.3769 on Friday afternoon – its highest level in a month.

The pound was boosted on Monday after BoE Governor Andrew Bailey underscored the need to control inflation and fellow policymaker Michael Saunders said households must prepare for “significantly earlier” interest rate hikes.

However, two other central bank officials – Catherine Mann and Silvana Tenreyro – were more dovish on the topic on Thursday, pushing back against rate rises.

The dollar edged lower on Friday, as global risk appetite rebounded, reducing demand for the safe-haven currency.

Inflation figures in the spotlight for the pound

The pound will be driven by news headlines rather than data on Monday and Tuesday, with the Rightmove House Price Index the only UK economic indicator pencilled in the calendar at the start of the week

Inflation figures – due for release on Wednesday – are in sharp focus for investors in the pound.

Economists expect inflation to peak at over 6% in 2022. The BoE is charged with keeping the Consumer Prices Index (CPI) between 1% and 3% – although, given current conditions, the central bank argues that the blip in inflation will be temporary.

The latest CPI number will be closely monitored by investors for clues about the future direction of UK interest rates.

The week concludes with the influential Markit Services Purchasing Managers’ Index for October. The UK’s dominant service sector, which makes up about 80% of the economy, is currently in a growth phase. Any reading above 50 signals expansion, while a reading under 50 shows contraction.

Investors await furth clues around the timing of US interest rate rises

The potential for the dollar to strength is based on expectations that the US Federal Reserve may begin hiking rates sooner than had been anticipated. However, some market participants believe this forecast may have been overblown, causing the dollar to consolidate.

The dollar has rallied since early September on expectations the Fed would tighten monetary policy more quickly than previously forecast amid an improving economy and surging energy prices.

Minutes of the Fed’s September meeting confirmed last week that fiscal stimulus tapering is all but certain to start this year, although policymakers are divided over inflation and how to manage it.

Several speeches by US central bank officials this week could provide further insights into the Fed’s stance on the timing of interest rate rises and winding down its massive bond-buying programme.

Currency markets are currently pricing in 50/50 odds of a 25 basis point rate hike in the US by July.