GBP/USD heads for weekly loss as cenbank hawkishness clouds growth outlook

Key points

The Sterling did not manage to maintain gains after the Bank of England’s policy decision yesterday and was heading lower on Friday, mostly because of a stronger US Dollar.

The greenback was underpinned by investors’ rush to safe haven assets, since a series of hawkish moves by global central banks fueled concerns over economic growth outlook.

The Bank of England raised its benchmark interest rate by 50 basis points to 5% at its June meeting, while exceeding expectations of a smaller 25 basis point rate hike.

The rate decision brought borrowing costs to their highest level since the 2008 financial crisis, as inflation in the UK remained elevated.

The headline consumer price inflation in the UK unexpectedly remained steady at 8.7% in May, while the core CPI inflation accelerated to 7.1%, the highest level since March 1992.

BoE policy makers also pledged to raise rates further in case the ongoing inflationary pressures continue to persist.

“With the Bank of England set to raise rates substantially further, we expect the UK economy to come under renewed pressure by late 2023, and look for growth to either stagnate or even for the economy to contract,” Nick Bennenbroek, international economist at Wells Fargo, was quoted as saying by Reuters.

Meanwhile, Federal Reserve Chair Jerome Powell said on Thursday that interest rates would be moved at a “careful pace” from here.

“We’re at least close to where we think our destination is…and it only makes common sense to move…at a careful pace,” the Fed Chair said during a hearing before the Senate Banking Committee.

According to Powell, the point of keeping rates on hold at the Fed’s policy meeting last week was precisely to slow the pace at which the central bank was raising borrowing costs.

Markets are now pricing in a 74% chance of a 25 basis point interest rate increase at the Fed’s meeting in July.

As of 7:20 GMT on Friday GBP/USD was edging down 0.29% to trade at 1.2710. Yesterday the major Forex pair went up as high as 1.2841. The latter has been the pair’s strongest level since June 16th (1.2848).

GBP/USD looked set to register its first drop in four weeks, being down 0.88%.