Pound US Dollar (GBP/USD) Exchange Rate Wobbles amid UK and US Recession Risks
(Updated 15:55, 6/4/22) The Pound US Dollar (GBP/USD) exchange rate rebounded from a three-week low this morning before fluctuating. The movement comes as both currencies face headwinds over looming domestic recessions.
Yesterday, Deutsche Bank forecast a US recession in late 2023 due to potential aggressive action from the Federal Reserve. It is the first major bank to do so and comes off the back of some unusual changes in the US yield curve – often an early indicator of a coming recession.
Deutsche Bank economists, led by Matthew Luzzetti, wrote:
‘We no longer see the Fed achieving a soft landing. Instead, we anticipate that a more aggressive tightening of monetary policy will push the economy into a recession’.
Meanwhile, another Deutsche Bank report warns that recession risks are also rising for the UK.
Sanjay Raja, Chief UK Economist at Deutsche Bank and author of the report, says:
‘Importantly, we continue to think that recessions risks remain on the rise.
‘This is something we will be tracking very closely in the coming months. Consumer confidence data are already consistent with recessionary levels.
‘And our proprietary household surveys are consistent with a materially deteriorating outlook for the household sector. Our surveys point to slowing momentum in household spending, with more households tapping into excess savings to fight off the cost of living shock.’
With these gloomy predictions weighing on both currencies, GBP/USD wavered today.
Original article continues below:
Pound US Dollar (GBP/USD) Exchange Rate Recoups Overnight Losses amid Dip-Buying
The Pound US Dollar (GBP/USD) exchange rate hit a three-week low this morning before rising sharply higher as Sterling entered oversold conditions and regained its overnight losses.
However, the Pound (GBP) still faces headwinds. The UK’s income crunch is worsening, and markets remain downbeat. As a result, GBP’s recovery may be limited.
Pound (GBP) Recoups Losses but Headwinds Remain
The Pound dipped earlier this morning, slipping to a three-week low against the US Dollar (USD) just before the European session began.
The initial downside in the Pound came as the UK’s cost-of-living squeeze tightens. Today, National Insurance contributions for both employees and employers increase by 1.25 percentage points. This tax hike follows last week’s surge in energy bills as the energy price cap rose by 54% on ‘Bleak Friday’.
Bank of England (BoE) Governor Andrew Bailey has warned that UK households face a ‘historic shock to real incomes’, while the Office for Budget Responsibility (OBR) said ‘living standards are set for a historic fall’.
With both workers and businesses now paying higher taxes and facing rising price pressures, GBP investors are concerned about how this will impact the UK economy.
However, Sterling seems to have attracted some dip-buying. Since hitting a three-week low, GBP/USD has jumped sharply higher. That said, it has not yet recouped yesterday’s losses. At the time of writing, the Pound US Dollar pair remains close to the level reached at the close of yesterday’s European session.
US Dollar (USD) Slips despite Risk-Off Mood
Meanwhile, the US Dollar caught some bids earlier today as a souring market mood supported the safe-haven currency.
One factor contributing to risk aversion is the worsening Covid situation in China. Beijing is trying to implement a zero-Covid strategy, which has led to increasingly widespread lockdowns.
Shanghai, a vital financial hub for the Chinese economy, is now under a city-wide lockdown affecting its 26 million inhabitants. Economists fear that lockdowns could cause more supply-chain disruption and add to already eye-watering inflationary pressures.
The risk-off mood is exacerbated by the Russia-Ukraine war. The latest sanction proposals and reports of civilian massacres in Ukraine are casting dark clouds over European markets.
But despite the anxious market mood, the safe-haven US Dollar is retreating today, as economists begin to murmur about the early signs of an economic recession in the US.
Markets are beginning to worry that more aggressive action from the Federal Reserve could push the US economy into recession. Yesterday, Deutsche Bank predicted that such an event would come to pass.
Adding to the concerns, recently the US Treasury yield curve has inverted during trade, meaning a two-year bond has briefly yielded more than a ten-year bond. This unusual movement is often an early signal of a looming recession.
As a result, USD investors seem spooked and the US Dollar is pulling back.
GBP/USD Exchange Rate Forecast: Can Sterling Sustain Its Rally?
Looking ahead to the rest of the session, news from the Russia-Ukraine crisis could affect Sterling. After evidence of invading soldiers committing atrocities in Russian-occupied Ukrainian towns, both the US and the EU are looking to impose new sanctions on Moscow. If the UK follows suit it could weigh on GBP as further sanctions will add to the pressure on the UK economy.
As for the US Dollar, risk sentiment could drive most movement ahead of the Federal Open Market Committee (FOMC) meeting minutes this evening. The FOMC minutes could then impact USD. However, with hawkish action from the Fed already priced in, the ‘Greenback’ could find its gains limited.