The pound has weakened against the US dollar as the greenback rose amid higher US treasury yields and Fed-BOE policy divergence. Covid concerns and the war in Ukraine will also keep the pound lower as markets await the Bank of England Governor Andrew Bailey's speech.
The pound against the euro remains supported but struggles for momentum due to uncertainty about the BoE rate outlook.
Pound - US Dollar exchange rate
The pound to US dollar exchange rate was lower on Monday as the strength of the US dollar weighed the pair down. The dollar was boosted by rising US T-bond yields following last week’s comments from US Federal Reserve policymakers which strengthened expectations for a 50-basis points rate hike in May. According to the CME Group FedWatch Tool, markets are pricing in a possible double rate hike at the next FOMC meeting.
Bank of England speeches
Analysts have warned that speeches from BoE Governor Andrew Bailey and Deputy Governor for Monetary Policy at the Bank, Ben Broadbent, may see a decrease in BoE expectations and a fall in the pound as the Bank is expected to warn against high expectations for more rate hikes which could lead to inflation falling below the Bank’s target.
BoE's Bailey will deliver a speech titled "Macroeconomic and Financial Stability in Changing Times" and a Q&A session will follow as well. Disappointing economic releases which showed that the private sector's business activity in early March expanded at a softer pace than in February and a drop in retail sales in the same month will put more pressure on the BoE as inflation continues to rise.
The speeches from BoE Governor Andrew Bailey and Deputy Governor Ben Broadbent are scheduled for Monday and Wednesday respectively and will be closely watched by investors for any signs that will shed light on the outlook for the Bank Rate. If Bailey suggests that the Bank will adopt a cautious stance with regards to future rate hikes, then the pound could continue to weaken.
Financial markets will focus on the negotiations between Russia and Ukraine, which are set to recommence in Turkey on Monday and continue until Wednesday. Any progress toward a ceasefire agreement or resolution of the conflict would support the pound and vice versa.
The euro has been more sensitive to the outcome of the negotiations between Russia and Ukraine, and the pound could fall against the euro if the peace talks result in a resolution or a ceasefire agreement.
If the market diminishes its expectations about further tightening, then the pound will weaken. The BoE said in its March policy decision that higher energy costs will shrink the economy and reduce domestically generated inflation, potentially making them a replacement for some of the interest rate rises the Bank had previously proposed. As analysts note, some rate hikes could be delivered in the near-term, but how these are communicated will be influenced by economic data and geopolitical factors. According to February’s forecasts, the Bank Rate was expected to rise to 1.5% by early 2023. Markets will closely watch the next round of projections due out in May which will show to what degree the BoE’s outlook has been affected by the war in Ukraine, higher energy costs and inflation.
The outlook for the Bank Rate is considered to be a risk for the pound, but the divergence between BoE and ECB policy could benefit the pound to euro exchange rate. Analysts expect the pound to strengthen against the G10 currencies but fall against G10 commodity currencies.