Pound Hits Fresh 28-Month Low vs US Dollar as BoE Signals 1 in 3 Odds of Brexit Recession

GBP/USD Exchange Rate Falls as BoE Warns of Brexit Recession Risk

UPDATE: As the Bank of England (BoE) opted to lower its growth forecasts in the face of ongoing Brexit-based uncertainty the Pound Sterling to US Dollar (GBP/USD) exchange rate remained under pressure.

The pairing fell to a fresh 28-month low this afternoon as BoE policymakers warned that there is now a one in three chance of a Brexit recession, highlighting the negative headwinds currently facing the UK economy.

While the BoE maintained its assumption of a smooth Brexit transition this was not enough to prevent Pound Sterling (GBP) falling out of favour with investors once again.

GBP/USD Exchange Rate Resumes Slide as UK Manufacturing Remains at Six-and-a-Half Year Low

The Pound Sterling to US Dollar (GBP/USD) exchange rate came under renewed pressure this morning as the UK manufacturing sector showed continued deterioration.

Although July’s manufacturing PMI bettered forecasts, holding steady at 48.0 rather than falling to 47.7, this failed to offer investors any cause for confidence in Pound Sterling (GBP).

As the index remains stuck at a six-and-a-half year low the outlook for the manufacturing sector appears weak, with Brexit-based uncertainty continuing to constrain growth.

This poor showing raises the risk of the UK economy losing fresh momentum in the third quarter, keeping the threat of a recession alive and limiting the potential for GBP exchange rate strength.

As Duncan Brock, Group Director at the Chartered Institute of Procurement and Supply, commented:

‘A killer combination of economic uncertainty and the weakest production levels for seven years, battered the manufacturing sector into contraction for the third consecutive month in July. New orders fell as businesses used up stockpiled materials, EU businesses moved supply chains out of the UK and weakness in the global economy stifled demand from both domestic and export markets.’

Less Dovish Fed Message Shores up US Dollar (USD)

Demand for the US Dollar (USD), meanwhile, strengthened in the wake of the Federal Reserve’s unexpectedly hawkish performance overnight.

While the US central bank still cut interest rates to 2.25%, as widely expected, the tone of the accompanying policymaker commentary proved less dovish than anticipated.

With the Federal Open Market Committee (FOMC) now looking set to leave interest rates on hold in the months ahead USD exchange rates were able to recover some of their recent weakness, trending higher across the board overnight.

As Fed Chair Jerome Powell noted that yesterday’s move was ‘not the beginning of a long series of rate cuts’ investors were encouraged to pile back into the US Dollar, with confidence in the economic outlook improving.

Pound Sterling Braces for Signs of Increased BoE Caution Today

Further losses appear likely for the GBP/USD exchange rate today as the Bank of England (BoE) announces its latest policy decision.

There is no expectation for the BoE to alter interest rates at this juncture, although markets are likely to pay close attention to the tone of the meeting minutes.

Any signal that the BoE could cut interest rates before the end of the year, in response to the increasing risk of a no-deal Brexit, would leave Pound Sterling exposed to more selling pressure.

Signs of dovishness in the latest quarterly Inflation Report may also weigh on GBP exchange rates this afternoon, given the high level of uncertainty that continues to hang over the economic outlook.

Resilient US Manufacturing Set to Boost USD Exchange Rates Further

USD exchange rates could find an additional rallying point this afternoon with the release of July’s ISM manufacturing index.

While other indicators from the US manufacturing sector have shown weakness forecasts still point towards a modest uptick in the index.

If the headline figure picks up from 51.7 to 52.0 as anticipated this would offer the US Dollar another boost against its rivals, with the impact of ongoing trade tensions appearing limited.

However, another downside surprise from the manufacturing sector could help to lift the GBP/USD exchange rate away from its latest 28-month low today.

Louisa Heath

Contact Louisa Heath