GBP/USD Flat Despite US dollar’s strength

The US dollar is robust at the start of the week, with the DXY higher on the day so far by nearly 0.5% and for three straight sessions.

Markets still pricing a lot more than what the Bank of England has guided. GBP/USD is flat on the day and has traded between 1.3086 low and 1.3136 high, sustaining US dollar strength better than its rival, the euro, for now.

US yields have been on the up due to the narrative surrounding the Federal reserve and as civilian killings in north Ukraine keep the safe-haven appeal alive in financial markets.

For the moment, risk markets are taking the expectation of successive 50bp rate rises at the May and June FOMC meetings in their stride. With markets still pricing a lot more than what the Bank of England has guided to markets, the focus will be on the MPC speak this week as it is becoming more and more important.

Continued pushback on market is much hoped, with Bailey, Cunliffe, and Pill all commenting on monetary policy during this week. Cunliffe will be most interesting, as he was the lone dove in March, so we watch for any change in position

BoE’s policymakers are aware that there is an economic cost to hiking interest rates. They are also aware that conventional theory suggests that taking the necessary action to keep inflation expectations confined brings a far better economic outcome long-term than allowing hyper-inflation to become entrenched.

Noting that there is an energy price crisis which has been exacerbated by the war in Ukraine, the analysts explained that this came on top of the supply side issues brought about by the pandemic and by Brexit. The market has re-considered the outlook for UK rates in the wake of the BoE’s dovish tightening in March. However, in our view, the market may still have too many rate hikes priced in. This leaves GBP vulnerable against both the USD and the EUR.