GBP/USD pair rallied as high as $1.2655 on Monday morning, levels that haven’t been seen since May 2022 on bullish fundamentals for the Sterling versus bearish catalysts for the greenback.
GBP/USD pair, Daily chart
Investors have been bullish on GBP as the combination of double-digit inflation and a tight labour market in the British economy, are fuelling bets for further rate hikes this year by BoE, in contrast to Federal Reserve that it hinted at a pause in interest rate hikes due to the recent bank crisis and deteriorating economic data.
BoE-FED monetary policy divergence:
The pair has gained more than 2200 pips or over 20% since bottoming at $1.04 a dollar on September 26, 2022, mainly due to the more resilient UK economy versus the U.S. economy, especially after the recent U.S. banking crisis, coupled with the BoE-FED monetary policy divergence.
The Bank of England is expected to raise interest rates by another 25 basis points to 4.50% on Thursday, May 11, as it continues its battle against persistent inflation, while many economists predict a further 25 bps hike to 4.75% at the June meeting, which might be the terminal rate.
While inflation slowed to 5% in the U.S. and 6.9% in Eurozone last month, the U.K.'s inflation rate (10.1% in April) has remained above 10% for eight of the past nine months, worsened by soaring food costs and shortages in the labour market linked to Brexit, keeping wages high.
Core inflation, which excludes volatile food, energy, alcohol, and tobacco prices, rose by 6.2% y-y in March 2023, unchanged from the annual climb of February, creating a big concern for the Bank of England. The labour market remains tight, reaffirming that risks to inflation are firmly skewed to the upside.
The day after the BOE decision, the U.K. is to release data on first quarter GDP which is expected to indicate that growth remained weak in the first three months of the year.
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