GBP/USD Rate Struggles Near 1.20 as BoE and Fed Hawks Cross Paths 

"With inflation still well above the Committee’s longer-run goal of 2 percent, participants agreed that inflation was unacceptably high. A number of participants commented that the costs of elevated inflation are particularly high for lower-income households. Participants noted that inflation data received over the past three months showed a welcome reduction in the monthly pace of price increases but stressed that substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path" FOMC Minutes.

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The Pound to Dollar exchange rate came under pressure near 1.20 in the penultimate session of the week as financial markets mulled upside risks to Federal Reserve (Fed) and Bank of England (Fed) interest rates, the relative balance of which is potentially a constraint on Sterling's recovery prospects.

Sterling pared earlier losses against a handful of counterparts in the G10 and G20 baskets on Thursday after the Bank of England's most hawkish interest rate setter, Catherine Mann, warned that Bank Rate could have to rise somewhat further in the months ahead. 

"In the end, monetary policy has taken a path which has been historically aggressive, but perhaps insufficiently so relative to the multiple shocks, the behaviours pushing up inflation, and the initial accommodative starting point," she told the Resolution Foundation. 

"I believe that more tightening is needed, and caution that a pivot is not imminent. In my view, a preponderance of turning points (Mann, 2023) is not yet in the data," she added in the partial conclusion of a speech at the "Future of the UK Economy" conference in Sheffield.

At the heart of this view is "the embedding of on-going inflation into the wage-and-price-setting paths," which is at risk of keeping inflation elevated for longer and, ultimately, of prolonging the period of time over which interest rates remain at their increased levels. 

Above: Pound to Dollar rate shown at 15-minute intervals with selected moving averages. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

Recent data showed UK wages rising at increased pace in the final months of last year with growth in regular pay accelerating to a new high while the fear among central bankers that this will lead companies to keep raising prices at rates that sustain inflation above the desired levels. 

"We decided at the start of this year to increase our standard mortgage advice fee to £495 from £395, where it had been set for several years," says Scott Taylor-Barr, of Shropshire-based Carl Summers Financial Services: "The rising costs of both regulation in the financial services world, plus the increases in general bills like heating and lighting meant we couldn't continue to maintain the lower fee level."

That has so far been a recipe for unwanted increases in interest rates and the danger is that those could go on if inflation continues to rise, which may not have been quite the crux of Thursday's remarks, but is certainly the risk ahead for the UK economy. 

Thursday's remarks appeared to support Sterling by staunching its earlier losses but the trouble for the Pound is now that risks remain as regards the Federal Reserve interest rate outlook, which was reiterated again in Wednesday's release of minutes from February's Federal Open Market Committee meeting. 

"With inflation still well above the Committee’s longer-run goal of 2 percent, participants agreed that inflation was unacceptably high. A number of participants commented that the costs of elevated inflation are particularly high for lower-income households. Participants noted that inflation data received over the past three months showed a welcome reduction in the monthly pace of price increases but stressed that substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path," the minutes read in one part. 

Above: Pound to Dollar rate shown at daily intervals with selected moving-averages. Click image for closer inspection. 

"A couple of participants observed that changes in wages tend to lag changes in prices, which can complicate the assessment of inflation pressures.  A couple of participants remarked that the poor performance of labor productivity growth last year was restraining aggregate supply, which was contributing to imbalances between aggregate demand and aggregate supply and therefore to upward pressure on inflation," the minutes read in another part. 

Federal Reserve policymakers set out their outlook for interest rates in December, and forecasts suggested the Fed Funds interest rate can rise to within a range of between 5% and 5.5% under some circumstances, which financial markets have since come to price-in. 

But the risk ahead is that they have to rise further as part of the Fed's own pushback against rising wages in the U.S. economy, which has outperformed the UK economy over almost every horizon in recent times, and this prospect is downside risk for the Pound to Dollar exchange rate. 

"The resultant USD strength will be a difficult current for GBP/USD to swim against.  The BoE’s Catherine Mann’s speech today will be topical with the title ‘the results of rising rates: expectations, lags and the transmission of monetary policy," says Carol Kong, an economist and currency strategist at Commonwealth Bank of Australia. 

"In our view, AUD/USD is likely to unwind its gains today while markets focus on the prospect of a more restrictive FOMC policy," Kong and colleagues also write in a Thursday market briefing. 

Above: AUD/USD shown at daily intervals alongside GBP/USD. Click image for closer inspection. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)