Greenback Could Drop on Big Bank of England Rate Hike

  • The US dollar will drop against the pound if the Bank of England issues a hefty rate hike in August, Forex.com said Thursday.
  • The BOE could raise its key rate by 50 basis points, marking the largest increase since 1995.
  • The pound may then rise to $1.25 against the greenback, a level it hasn’t traded above since early June.

The Bank of England could soon issue its largest rate increase in nearly 30 years, knocking down the US dollar to a nearly two-month low against the British currency, a Forex.com analyst said Thursday.

The BOE is considering raising its benchmark interest rate by 50 basis points at its August 4 meeting as policy makers continue to confront high UK inflation. That would be the biggest rate increase since 1995, taking the benchmark borrowing level to 1.75%.

“The Bank of England’s ‘steady as she goes’ approach to interest rate hikes (25 basis points) has been heavily as criticized as inflation in the UK surged to [a] new 40-year high of 9.4%,” Fawad Razaqzada, market analyst at Forex.com, wrote in a note.

If the central bank goes with a half-point increase, “then expect the GBP/USD to climb towards mid-1.20s, possibly reaching 1.2500 by Friday, especially if we also see further weakness in US macro data as well,” he said . The pound hasn’t traded above $1.25 since June 9.

The dollar has risen by roughly 11% against the British pound during 2022. The UK currency was buying about $1.216 during Thursday’s session. The dollar has also flown up against other currencies this year, including the euro and the Japanese yen. The US Dollar Index recently hit a fresh 20-year high above 109. The index on Thursday was above 106, marking a year-t0-date rise of almost 11%.

The dollar has rallied as the Federal Reserve continues an aggressive rate-hike campaign to cool down hot inflation. The Fed on Wednesday raised the fed funds rate by 75 basis points, the second straight rate hike of that size and the fourth increase this year. The US benchmark interest rate now stands at 2.25% to 2.5%.

While a hefty BOE rate hike could dent the dollar’s value, the greenback is also vulnerable to sluggish US economic reports, said Razaqzada. The US Dollar Index fell Thursday as a preliminary second-quarter report on US gross domestic product showed economic activity shrank by 0.9%. The Commerce Department’s reading was worse than a Bloomberg consensus estimate of a 0.5% contraction.

The data puts the US economy on course for a technical recession as the economy shrank by 1.6% in the first quarter.

The “GDP [report ] was quite poor, so there won’t be a hat trick of 75 basis point hikes in September, that’s for sure,” the analyst said about the Fed’s meeting next month.

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