The US dollar could fall to a two-month low against the British currency if the Bank of England raises its rate.
Policy makers at the Bank of England are considering raising the benchmark interest rate by 50 basis points. That would be the biggest rate increase since 1995
The Bank of England's'steady as she goes' approach to interest rate hikes has been heavily criticized as inflation in the UK surged to a new 40-year high.
"If the central bank goes with a half-point increase, then expect the pound to climb towards mid-1.20s, possibly reaching 1.2500 by Friday, especially if we see further weakness in US macro data," he said. The pound has not traded above $1.25 in over a month.
The dollar has appreciated against the British pound in the last four years. The pound was buying about $1.216 on Thursday. The dollar has gone up against a number of other currencies this year. The US Dollar index hit a new 20-year high. The year-to-date rise is almost 10% and the index was above 106 on Thursday.
As the Federal Reserve continues to raise rates, the dollar has appreciated. The fed funds rate was raised by 75 basis points, the second hike of that size and the fourth increase this year. The interest rate in the US is 2% to 2.5%.
The dollar is vulnerable to sluggish US economic reports as a result of a hefty rate hike by the Bank of England. The US Dollar fell as a report showed the US economy shrank in the second quarter. The Commerce Department reading was worse than expected.
The US economy contracted by 1.6% in the first quarter, putting it on track for a technical recession.
"GDP 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.
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