The British Pound to USD is at 1.2166 on July 29, 2022. Bank of England is expected to raise rates this week as inflation hits a 40-year high.
British Pound to USD Awaits Rate Hike by the BoE
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It is the second consecutive weekly gain for the British Pound to USD. There is a fear of recession in the country as inflation surges higher. The Bank of England is expected to hike rates in the meeting this week. The British Pound to USD touched a low of 1.1759 on July 14 but moved positively from the low levels. GBP/USD is currently trading at 1.2167.
Recession fears loom ahead of the United Kingdom, the Eurozone, and the United States. Central banks have raised rates in developed countries to curb inflation, but recession fears are setting in. Supply chain disruptions caused by the Russian invasion of Ukraine are driving commodity prices in the UK higher. Bank of England has hiked rates five times since December.
The European Central Bank hiked rates by 50 basis points last week, while the Fed hiked rates by 75 basis points in June. Bank of England may raise rates in line with its peers in the next meeting.
Energy Prices Increase with Supply Constraints from Ukraine War
UK inflation is at a 40-year high, and the economic conditions are not very bright. Inflation is at 9.4% in the country. The energy crisis is hindering economic activities in the country. After the Russian invasion of Ukraine, the energy supply has come down, and energy bills have shot up. Prices are projected to rise again from October as the winter season sets in.
The Ukraine war has brought a shortage in commodities and food grains. Ukraine supplies wheat and other goods to the United Kingdom. Exports from Ukraine have come down with low production.
Political Jitters in the UK
Since Prime Minister Boris Johnson stepped down, the leadership contest in the country is high. Ex-Finance Minister Rishi Sunak and Foreign Secretary Liz Truss are in the race for the top position in Britain.
Analysts predict a 50 basis point hike by the Bank of England. BoE may set its largest interest rate hike in 30 years, as policymakers will have to confront high inflation in the country. It will take the British Pound to US Dollar to $1.25. However, the race for the top leadership keeps the British Pound to USD under pressure.
Working conditions in the United Kingdom are worsening. Railway workers went on a nationwide strike on Wednesday, making situations worse.
Bank of England Predicted to Hike Rates
Experts predict the Bank of England to hike rates by 25 basis points in the next meeting in August 2022. The four-decade high inflation is driving prices higher in the UK. It will be a modest increase in rates, as the central bank has to prevent the country from recession. Currently, rates are at 1.25%. If the central bank increases rates by 25 bps, rates will be at 1.50% in August.
The unemployment rate holds steady at 3.8% for three months ending May 2022. The labor market is good though the cost of living is moving up. Full-time and part-time employment is increasing in the United Kingdom. Consumers have cut down their spending expenses as the economy slows down. Business activities have slowed to their lowest in 17 months in July 2022, as supply chain restrictions affect the business sector.
Oil prices went to $140 per barrel when the Russian-Ukraine war started. Currently, it is trading at around $108 per barrel. High petrol prices have pushed inflation to 9.4% in the last 12 months. Though prices have dropped, there is a lack of consumer confidence.
Retail sales month-on-month has improved from -0.8% to -0.1%. Manufacturing PMI dropped to a two-year low at 52.2 in July. Weak demand conditions and low business confidence are affecting the business sector. Services PMI is at 53.3 in July 2022, slightly above estimates of 53. The service sector is expected to improve as travel and recreation activities begin after the Covid-19 pandemic.
Major Currency Pairs
The GBP/EUR currency pair shows weakness as household shopping has come down with slowing consumer confidence. Credit card usage has increased with rising living costs.
Inflation in the Eurozone is at a record high of 8.9% for the 12 months up to July. Inflation is highest in the Netherlands, Spain, and Greece. Inflation is already high in the UK and expected to reach 11%.
US Dollar News
The US Dollar is at a 2-decade high. The macro data in the US shows signs of weakness, and the Pound may strengthen with the Dollar moving lower.
The Fed raised interest rates by 75 basis points on Wednesday. It is the second rate increase and the fourth hike in 2022.
The Dollar has rallied higher against other major currencies. The US Dollar has gone up by more than 10% against the British Pound in 2022.