GBP USD Exchange Rate Extends Rally in Quiet Session 

GBP USD Exchange Rate Nudges Higher on Rate Hike Expectations 

The pound continued to pull away from two-week lows against the dollar on Monday, having dipped below 1.20 at the end of last week.  

An empty economic calendar on both sides of the Atlantic on Monday meant UK policy tightening expectations were the driving force behind the pound’s rally.  

Investors anticipate further signals from the Bank of England (BoE) this week over its future interest rate path, with Governor Andrew Baily and Chief Economist Huw Pill speaking on Tuesday and Wednesday respectively. 

The UK currency ended June with some sobering stats to digest: it concluded its steepest six-month drop since 2016 – down more than 10% against the dollar so far this year – and it recorded its worst quarter since 2008. 

The pound spiralled lower amid mounting concerns about the health of the UK economy, with the BoE tasked with taming soaring inflation – which hit a 40-year record of 9.1% last month – while avoiding a recession. 

Dollar lacks impetus

With US markets closed for Independence Day on Monday, risk-sensitive currencies like the pound gained ground against the dollar, which advanced to a two-week high on Friday. 

Speculation that the White House will announce an easing of some Chinese tariffs later this week to cool red-hot inflation gave markets a shot of optimism. 

The dollar’s safe-haven status galvanised the currency recently and offset softening US rate hike expectations. Market participants are pricing in around an 85% chance of another rate rise of 75 basis points this month and rates at 3.25% to 3.5% by the end of the year – followed by cuts in 2023. 

Looking ahead

The final UK services PMI and composite PMI – covering services and manufacturing businesses – for June release Tuesday, with both expected to hold steady and signal contraction. 

The BoE’s Financial Stability Report – which details the Financial Policy Committee’s (FPC) assessment of the stability and resilience of the financial sector – will publish on Tuesday alongside the FPC’s most recent meeting minutes. 

BoE Governor Andrew Bailey and Monetary Policy Committee member Silvana Tenreyro will speak on Tuesday, with investors listening intently for interest rate chatter.  

Additionally, US factory orders hit the headlines on Tuesday.  

Investor attention will turn their attention to the publication of minutes from last month’s Fed policy meeting on Wednesday and closely watched US employment data on Friday. 

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