Monthly Wrap: GBP – Pound firms as BoE presses ahead with interest rate rise

Key takeaways:

• Central bank dynamics drive movement in the pound
• BoE less dovish than expected, boosting GBP
• GBP monthly lows: €1.12, $1.18, AU$1.78, NZ$1.93, C$1.62
• GBP monthly highs: €1.14, $1.23, AU$1.84, NZ$1.98, C$1.68

The pound slumped in early March as expectations of a widening policy divergence between the Federal Reserve and the Bank of England (BoE) sparked a GBP selloff. Fed Chair Jerome Powell made some hawkish remarks while BoE policymaker Swati Dhingra urged a halt to further rate hikes.

Sterling managed to bounce back, however, after Fed rate hike bets receded and the UK’s January GDP beat forecasts, with the British economy expanding 0.3% rather than the forecast 0.1%.

In mid-March, fears of a financial crisis in the US and Europe put some pressure on the pound. But once again Sterling recouped these losses and marched higher. UK Chancellor Jeremy Hunt unveiled his Spring Budget while claiming the country will avoid a recession in 2023.

GBP exchange rates managed to drift even higher as the month went on. The Bank of England raised interest rates by 25bps and signalled that it may raise rates again. Analysts had broadly expected the bank to signal a coming pause in its tightening cycle.

Upbeat retail sales data added to the pound’s upside. UK sales rose 1.2% in February, while the Confederation of British Industry (CBI) reported ‘encouraging’ signs of ‘resilience’ and ‘optimism’ among retailers.

Looking ahead, the UK’s GDP data for February, due out in the second week of April, is the first big release for Sterling. Analysts currently expect a modest contraction of 0.1%. If GDP beats forecasts again, the pound could surge higher.

The following week brings the latest employment and inflation data. If the releases show a cooling labour market and easing inflation, markets may pare back bets on further BoE rate hikes. This could heavily pressure the pound.

Finally, UK retail sales and April’s PMIs are due towards the end of the month. The releases could dent GBP if they confirm an expected contraction in sales and another cooldown in service sector activity.