GBP USD Exchange Rate Digests Partygate Report

GBP USD Exchange Rate Edges Higher on Rate Hike Expectations 

The pound was steady against the dollar early on Wednesday ahead of the publication of a report by senior civil servant Sue Gray into parties at Downing Street that broke lockdown rules.

As expected, Gray piled more pressure on Prime Minister Boris Johnson – and the pound – as the nation wrestles with a slowing economy and sky-high inflation.

She concluded that many of the events “should not have been allowed to happen” and that senior leadership at Downing Street “must bear responsibility for this culture”.

The damning report followed data on Tuesday that showed a sharp slowdown in British business activity in May, prompting investors to scale back rate hike expectations. Money markets are now pricing in around 120 basis points of policy tightening by the end of the year.

Bank of England Chief Economist Huw Pill said, in an interview published on Wednesday, that he thought more tightening would be needed but the central bank is conscious too much would leave the economy languishing in recession.

“(Too) much runs the risk that you fall into and get stuck in a deep recession, which is very costly and too little you run the risk that inflation gets this self-sustaining momentum and runs away from the target,”

US durable goods orders rise

The dollar edged higher on Wednesday ahead of the latest Federal Reserve meeting minutes, with the central bank repeatedly vowing to act aggressively by hiking borrowing costs.

A series of 50 basis point rate hikes over the next few months is currently forecast by market participants, raising fears that the world’s largest economy could grind to a halt.

Orders for durable goods from US factories increased last month, highlighting demand for equipment and merchandise.

Bookings for items meant to last at least three years increased 0.4% – compared to the 0.5% consensus – in April after a downwardly revised 0.6% advance the previous month, Commerce Department data revealed on Wednesday.

Looking ahead

The minutes from the Fed’s May meeting are published on Wednesday evening and will be analysed for clues regarding the speed and extent of future policy tightening.

Two notable data sets are slated for release in the US on Thursday: gross domestic product (GDP) figures for the first quarter and initial jobless claims for the week ended 20 May.

The US economy shrank 1.4% on an annualised basis at the start of the year, according to the first Q1 GDP reading – and the second print is not expected to deliver any material change.

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