Pound stumbles on dovish BoE rate hike

Philip McHugh February 3rd 2023 - 2 minute read

The pound weakened on Thursday in the wake of the Bank of England’s (BoE) latest interest rate decision.

Sterling opens today’s session on the back foot, with GBP/EUR subdued at €1.1190 and GBP/USD slipping to $1.2195. GBP/CAD is rangebound at $1.6269, while GBP/AUD and GBP/NZD hold steady at AU$1.7272 and NZ$1.8845, respectively.

Looking ahead, could a softer-than-expected US payroll report lead the US dollar to retreat today?

What’s been happening?

The pound retreated following the Bank of England’s interest rate decision on Thursday, despite raising rates by another 50bps.

The drop in Sterling was linked to the BoE’s policy outlook. A broadly dovish assessment led GBP investors to speculate the BoE is very close to ending its current tightening cycle.

At the same time, the European Central Bank (ECB) also concluded its latest policy meeting with a 50bps hike yesterday.

However, the hike failed to lift to euro. While the ECB signalled it would deliver another hike of equal size in March, it suggested any further increases would be data dependant, dashing hopes for at least a couple more hikes in 2023.

The US dollar, meanwhile, was strengthened by a prevailing risk-off mood, in addition to a strong rebound in US factory orders in December.

What’s coming up?

Turning to today’s session all eyes will be on the US as it publishes its latest non farm payroll report.

If payrolls underperform, similarly to Wednesday’s disappointing ADP employment figures, the US dollar could plunge. Weak employment growth would likely undermine Fed rate hike bets.

Also influencing USD exchange rates will be January’s ISM non-manufacturing PMI. Will a rebound in US service sector growth offer some support to the ‘greenback’? Or will another contraction pile more pressure on the currency?

In the meantime, confirmation the Eurozone’s service returned to growth last month could buoy the euro, so long as Ukraine concerns remain limited.

The UK will also release January’s finalised services PMI this morning. Could an upwardly revised reading help to underpin the pound?

Written by
Philip McHugh

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