GBP USD Sinks to 23-Month Low

GBP USD Sinks to 23-Month Low

The pound plummeted to its lowest level since July 2020 against the dollar on Thursday after the Bank of England (BoE) warned of a potential recession.

The UK currency was set for its biggest daily drop since the onset of the pandemic after it fell off a cliff into the 1.23 range.

Bank of England rate-setters met expectations by voting for a fourth consecutive rate rise since December, pushing borrowing costs up to 1% from 0.75% – their highest level since 2009. However, they warned that economic growth is expected to slow sharply, and inflation could peak at 10%.

Speaking at a press conference following the conclusion of the meeting, BoE Governor Andrew Bailey said: “We are walking this very narrow path now. The proximate reason for raising bank rate at this point is, it’s not only the current profile of inflation, what is to come and of course what that could mean for inflation expectations to come, but the risks as well,”

In its revised forecasts, the UK central bank said it now expects GDP to slow in the final three months of the year, with Bailey saying the UK should brace for a “very sharp slowdown”.

Dollar steadies after Fed-induced fall

The dollar regained traction on Thursday after the Fed’s policy action had caused it to tumble the previous day.

On Wednesday, the Fed announced its biggest interest rate increase in over 20 years as it moves to tame soaring inflation.

The central bank’s Federal Open Market Committee voted to lift its benchmark interest rate by half a percentage point to a range of 0.75% to 1%, following a 0.25 percentage point increase in March – the first increase since December 2018.

With US inflation currently at a 40-year high and showing no signs of cooling, further hikes are expected. The Economist Intelligence Unit is predicting another seven rate hikes in 2022, reaching 2.9% in early 2023.

Speaking at a press conference following the rate hike announcement, Fed Chair Jerome Powell said: “Inflation is much too high, and we understand the hardship it is causing. We are moving expeditiously to bring it back down,”

Looking ahead

The closely watched US jobs report is slated for release on Friday, with economists expecting nonfarm payrolls to have increased by 391,000 jobs in April having jumped 431,000 in March.

The report also includes the unemployment rate. In March the reading remained robust at 3.6%, meaning markets will be looking to see if there’s any deterioration in the rate.