GBP USD Climbs to Two-month High on Rate Expectations

GBP USD Exchange Rate Buoyed by Better-Than-Expected PMI data 

The pound has been on an upward trajectory since Monday, marching through the 1.35 resistance level against the dollar. Fuelled by investors expectations that the Bank of England will raise interest rates next month after an unexpected hike in December, it picked up the pace on Wednesday, climbing to a two-month high.

Mounting expectations that Britain will not introduce fresh Covid-19 restrictions that would restrict economic activity was also lending the UK currency support.

On Tuesday, several research papers added more weight to reports that Omicron is less severe than the Delta variant.

Despite Britain reporting another record daily high in Omicron-related cases, Prime Minister Boris Johnson on Tuesday said that “…with the Plan B measures that we introduced before Christmas, we have a chance to ride out this Omicron wave without shutting down our country once again.”

Fed meeting minutes signal earlier rate hikes

The dollar came under pressure on Wednesday despite a stronger-than-expected jobs report, with investors – who were seeking signs on when the Fed will start hiking rates – focused on the minutes from the Federal Reserve’s December meeting.

According to the ADP National Employment Report, private payrolls increased by 807,000 jobs last month, comfortably exceeding economists forecast for 400,000 jobs. However, climbing Covid cases tempered optimism due to the risk posed to labour market momentum.

In the runup to the release of the Fed’s minutes on Wednesday, Minneapolis Federal Reserve Bank President Neel Kashkari said he expected the central bank would raise interest rates twice this year to curb inflation.

When the minutes from the December meeting of the policy-setting Federal Open Market Committee arrived, they flagged the potential for earlier and faster interest-rate hikes amid a strengthening economy and high inflation.

“Participants generally noted that, given their individual outlooks for the economy, the labour market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,”

“Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate,” the minutes said.

The dollar was buoyed by the prospect of sooner than previously expected rate hikes, causing GBP USD to dip in value.

Looking ahead

The Markit Services Purchasing Managers’ Index (PMI) for December is slated for release from the UK economy this morning.

A clutch of influential data sets hit the headlines in the US today: goods and services trade balance, initial jobless claims for the week ended 31 December, factory orders, and the ISM services PMI.

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