GBP-USD Exchange Rate Touches 10-Month High in April
The pound picked up where it left off in March – when it posted its biggest monthly gain against the dollar since November – breaking above $1.25 for the first time since June 2022. Investors in the UK currency were buoyed by comments from the Bank of England’s (BoE) chief economist Huw Pill, who left the door open to more interest rate hikes.
The GBP-USD pair’s bright start to the month was dulled by the US Labour Department’s closely watched employment report on 7 April. Employers across the pond continued hiring at a brisk clip in March, causing the unemployment to drop to 3.5% – encouraging signs for the labour market that raised bets on the Federal Reserve hiking interest rates one more time next month.
Having dropped into the 1.23 mid-range against the dollar on 10 April, the pound capped off an impressive rebound four days later when it hit a fresh 10-month high at $1.2545 per dollar. Positive global risk sentiment and broad-based dollar weakness, amid expectation for a pause in Fed policy tightening, combined to propel the pound higher.
The pound’s fall from its perch was more rapid. Later the same day it plummeted to within a whisker of the 1.24 benchmark after hawkish comments from a Federal Reserve official sparked renewed interest in the dollar.
After plateauing in the wake of its drop, the GBP-USD pair experienced a choppy spell against a background of upcoming UK data expectations, upbeat China data, and inflation fears.
Data released by the Office for National Statistics on 19 April showed UK inflation fell by less than expected in March. The consumer prices index – a gauge of annual inflation – dropped to 10.1%, resuming a downward path after an unexpected rise to 10.4% in February. Inflation peaked at 11.1% in October.
With forecasts for a larger decline in the annual inflation rate to 9.8% avoided, the odds of the BoE hiking its base interest rate in May jumped on the news.
Following a period of relative calm, the GBP-USD pair was given a shot in the arm on 24 April by diverging monetary policy expectations on both sides of the Atlantic – with the BoE poised to continue tightening policy to bring down inflation, while investors are pricing in interest rate cuts this year by the Fed. The contrasting outlooks helped the pound climb back towards the 10-month high it hit against the dollar earlier in the month.
True to form in April, the pound didn’t hold on to its gains for long, dropping into the 1.23 range the following day before paring its losses as traders stepped away from safe-haven assets like the dollar.
Despite struggling to cling onto its spikes in value throughout the month, the pound remained on course to record overall gains against the dollar in April.
Interest rate announcements from both central banks will drive sentiment towards the pound and dollar in May.
First up is the Fed on 3 May, which is widely expected to increase borrowing costs by another 25 bps, but is seen pausing in June – potentially weighing on the dollar.
It’s the BoE’s turn on 11 May, with markets expecting the UK central bank to hike rates in a bid to cool red-hot inflation – which would be its 12th consecutive rise since commencing its policy tightening cycle in December 2021.
Influential data from the UK economy in May: GDP (12 May), ILO unemployment rate (16 May), CPI (17 May), services PMI (23 May).
Influential data from the US economy in May: manufacturing PMI (1 May), ADP employment change (3 May), nonfarm payrolls (5 May), CPI (10 May), retail sales (16 May), GDP (25 May).