Pound US Dollar (GBP/USD) Exchange Rate Softens over UK Cost-of-Living Crisis
The Pound US Dollar (GBP/USD) exchange rate is slipping this morning on fears over a mounting cost-of-living crisis in the UK, increasing uncertainty over the future of UK Prime Minister Boris Johnson, and a more unstable political situation in Northern Ireland.
After touching $1.36 during yesterday’s session following the Bank of England’s (BoE) decision to raise interest rates, GBP/USD is weakening today to trade around $1.3550 ahead of the highly influential US non farm payrolls data release this afternoon.
Pound (GBP) Dented by Growing UK Uncertainty
The Pound (GBP) is coming under significant pressure at the end of this week’s session as the threat of a cost-of-living crisis looms over the UK that risks weakening economic activity.
Against the backdrop of the BoE raising interest rates, soaring inflation, tax increases and Ofgem raising the energy price cap by 54%, UK household incomes face the worst squeeze in over 30 years.
Combined with the likely fall in consumer spending, the UK’s economic growth outlook looks increasingly gloomy.
The BoE’s accompanying forecasts yesterday echoed this sentiment, with UK economic growth ‘expected to slow to subdued rates’ after a near-term recovery in February and March.
The central bank also expects the unemployment rate to rise to 5% by the start of 2025, although this will follow a fall in the near term.
BoE Governor Andrew Bailey commented:
“It is going to be a difficult period ahead. We are already seeing, and we’re going to see, a reduction in real income.”
Meanwhile, the future of UK Prime Minister Boris Johnson appears increasingly in doubt after four of his senior aides resigned, with one publicly citing the reason as comments he made about opposition leader Sir Keir Starmer misleading parliament.
Developments in Northern Ireland and the lack of progress on the post-Brexit trade agreement on customs checks between the UK and EU have also dented Sterling sentiment.
An order from DUP minister Edwin Poots to officials to end checks on the Irish Sea border in protest at the Northern Ireland protocol heightened UK-EU tensions first of all.
Then, First Minister of Northern Ireland Paul Givan resigned over the border checks and the impasse in UK-EU negotiations, which threatens to severely weaken the decision-making powers of Stormont over the coming months.
US Dollar (USD) Steady on Rising Treasury Yields
The US Dollar (USD) has made gains on Friday, moving higher in line with US Treasury yields that have risen amid a more cautious market mood and volatile equity markets.
Slowing activity in the US service sector had weighed on the US Dollar yesterday, indicated by the latest ISM non-manufacturing PMI for January.
The data showed the slowest growth in the sector since February 2021, with a reading of 59.9, down on December’s 62.3. But the reading did come in above forecast of 59.5, softening the impact on USD.
Strength in the Euro has also weighed on the US Dollar due to the negative correlation in the pairing, after EUR exchange rates surged following the European Central Bank’s interest rate decision yesterday.
Meanwhile, the threat of a Russian invasion of Ukraine continues to cause market jitters and provides support for the safe-haven ‘Greenback’.
The US alleged this morning that Russia is planning a fake invasion pretext by staging a fake Ukrainian attack to justify ordering its forces into the country.
Pound US Dollar Forecast: GBP/USD to Fall?
The main driver of the Pound US Dollar exchange rate going into the weekend will be the release of the US non farm payrolls for January.
While the Federal Reserve has shifted its focus firmly on combating surging inflation due to recent signs of a healthy job market, a disappointing reading could weigh on USD exchange rates.
At the same time, the Pound looks set to remain under pressure due to a gloomy economic outlook and mounting political uncertainty surrounding the UK government and the Northern Ireland protocol.