- GBP/USD will end the week with losses close to 1%.
- The central bank divergence between the Fed and the Bank of England will favor the greenback.
- The Fed’s Kashkari supported 75 basis points in June and July, followed by hikes of 50 basis points.
The pound sterling extends its losses in the week, to end with losses close to 1%, after the rebound on Thursday afternoon after the Bank of England (BoE) rate hike of 25 basis points, with the GBP/USD reaching weekly highs around 1.2400. However, the USD regained some strength, and the USD bulls faded the rise in GBP/USD and sold the major currency at a better level. At the time of writing, GBP/USD is trading at 1.2181, down 1.36% in the American session.
Sentiment has improved as global equities have risen, except for the Dow Jones and S&P 500. On the currency front, market sentiment is mixed. The USD remains the protagonist as the US Dollar Index recovered Thursday’s losses and rose 1.11% to 104.967.
The divergence between the Fed and the Bank of England could favor the US dollar
On Friday, investors begin to price in the central bank divergence between the UK and the US. Initially, he favored the Bank of England (BoE), which was expected to raise rates by 50 basis points earlier in the week. However, with the UK economy starting to slow down and the BoE forecasting a recession by 2023, the “old lady” backed down and raised rates by a brisk 25 basis points. It is also worth noting that the BoE removed the forward guidance from the monetary policy statement, changing the phrase to “the scale, pace and timing of any further bank interest rate increases would reflect the Committee’s assessment of the economic outlook.” and inflationary pressures.
Apart from this, the US Federal Reserve took the bull by the horns and raised rates by 75 basis points, the biggest hike since 1994. Although it was a bold move by the Fed, its chairman Jerome Powell said in his press conference that moves of that size would not be “common,” which sounded dovish but opened the door to the July meeting for a move of that size or 50 basis points.
Meanwhile, once the central bank blackout period was over, speakers from the Bank of England and the Federal Reserve began making statements.
BoE Chief Economist Pill said markets will have to make their own judgment on whether the BoE is considering a 50 basis point hike, while underlining the conditionality around the inclusion of “strongly” in the statement. in the context of “if necessary”.
Meanwhile, Neil Kashkari of the Minneapolis Fed said he supported a 75 basis point hike in June and could support another in July. He added that a prudent strategy might be to continue with 50 basis point hikes. Earlier, St. Louis Fed President James Bullard said a soft landing is possible if post-pandemic change is done right.
As for the data, the US economic docket reported industrial production for May, which grew by 0.2% month-on-month. Although the reading fell short of expectations for a 0.4% rise, sentiment turned sour.
Technical levels
Source: Fx Street
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