Pound US Dollar Exchange Rate Slides as US Treasury Yields Soar to Two-Year High
(Update 17:00, 18/1/22) The Pound US Dollar (GBP/USD) exchange rate tumbled by around -0.4% to below $1.36 through Tuesday afternoon.
After US markets reopened following Monday’s closure, expectations for aggressive monetary policy tightening from the Federal Reserve pushed US Treasury yields to pre-pandemic levels, in turn triggering a rally in the US Dollar.
Investors are pricing in four interest rate hikes from the Fed in 2022, which also weighed on equity markets and increased safe-haven demand for the ‘Greenback’.
While the Federal Reserve meet at the end of this month, markets widely expect the US central bank to begin raising interest rates in March.
Pound US Dollar Exchange Rate Edging Lower as UK Faces Pay Squeeze
The Pound US Dollar (GBP/USD) exchange rate is weakening in the beginning of today’s session following the print of UK jobs data that showed a slowdown in wage growth.
At the time of writing, the GBP/USD exchange rate is trading at approximately $1.3618, down around 0.2% on the day’s opening level.
Pound (GBP) Rangebound as Data Shows Slowdown in Wage Growth
The Pound (GBP) is struggling against the US Dollar (USD) during Tuesday’s session in response to the UK’s average weekly earnings growth figures following the release of the latest jobs market data.
The figures met market forecasts of 4.2%, but showed a slowdown from the 4.9% in October, and was the slowest expansion in a year.
Within the private sector, wages increased by 4.5%, whilst wages in the private sector increased by 2.6%.
Although this is above pre-pandemic levels, the recent steep rise in inflation means that wages are below the rising cost of living.
Stephen Evans, chief executive of Learning and Work Institute, said:
“The year ahead will be dominated by the cost of living crunch and labour shortages. Today’s data shows prices rose faster than wages in November. With higher inflation and tax rises still to come, the Government needs to help households: the cost of living crunch has only just begun.”
Meanwhile, the UK’s unemployment rate for November dropped to 4.1%, below forecast, of 4.2%, which is the lowest unemployment rate since June 2020.
Martin Beck, chief economic advisor to the EY ITEM Club, said:
“The latest healthy set of labour market numbers reinforced hopes that job losses arising from the end of the furlough scheme in September were offset by strong demand for workers elsewhere in the economy.
“Employment over the September-November period rose 60,000. Combined with a pickup in inactivity, this was enough to lower the LFS jobless rate to 4.1%, a fall of 0.4 percentage points from the previous three-month period.”
US Dollar (USD) Firms on Risk-Off Sentiment
Meanwhile, the US Dollar is strengthening against the Pound amid the risk-off market mood which is increasing safe-haven demand for the ‘Greenback’.
The upcoming Federal Open Market Committee (FOMC) meeting next week is fuelling a more cautious market mood that has pushed US Treasury yields higher, and in turn the US Dollar.
Furthermore, New York and other North-Eastern states are benefitting from a decrease in positive coronavirus tests.
Over the weekend, approximately 400,000 tests were conducted in New York, with 12.9% confirming a positive result.
This suggests that the fourth wave of coronavirus has peaked in certain areas of the US.
However, US Surgeon General Vivek Murthy has warned that ‘the entire country is not moving at the same pace’ and is asking people to remain cautious.
Pound US Dollar Exchange Rate Forecast: Will US Manufacturing Data Impact USD?
Looking ahead, the Pound US Dollar (GBP/USD) exchange rate may experience modest movement from US data scheduled for release later today.
This afternoon, USD may be impacted by the NY Empire State Manufacturing Index which is forecast to decrease from the previous 31.9 to 25.7.
Later in the week’s session, USD may also be affected by the initial jobless claims data which is forecast to decrease from 230K to 220K, implying that more people are now in employment.
However, if risk-off trade persists the US Dollar may extend today’s early gains.
Meanwhile, Sterling is likely to be impacted by the UK’s inflation rate for December which is forecast to increase from 5.1% to 5.2% because higher inflation may cause the Bank of England (BoE) to hike interest rates at the February policy meeting.
Sterling may also be impacted by a speech scheduled to be delivered on Wednesday by the BoE’s Governor Andrew Bailey.