USD dropped sharply after a cautious tone from Fed Chair Powell

GBP

On Monday Sterling rallied against the euro and US dollar. The British pound wasn’t fazed by manufacturing output and new orders declining at the fastest rate since May 2020. UK Manufacturing PMI fell last month to 52.1 from 52.8 in June, revised down slightly from a preliminary July reading of 52.2.

All eyes are on the Bank of England this Thursday with the new interest rate decision being made. Investors have begun pricing in a 80% chance of a 50 basis points hike, however there are talks of the BoE staying in line with the previous 25 basis points hikes. Should the BoE undershoot market expectations with a lower increase, it is highly likely that the pound will come under pressure. A 50 basis points hike may deliver a temporary spike in the pound.

Sterling has greatly benefitted from the gas supply challenges the Eurozone is facing and from the Federal Reserve’s new dovish outlook on hiking interest rates. We saw Sterling trading at three-month highs against the euro and GBP/USD touching 1.22 for the first time since June.

USD

Following the Fed’s decision to raise rates by 75 basis points on Wednesday, the dollar dropped sharply after a cautious tone from Fed Chair Powell. GDP growth for the second quarter printed a surprise contraction, pushing the US economy into a technical recession. The US is also set to see fresh PMI figures this week. A forecast downturn to July’s figures could weigh on USD.