GBP/USD Exchange Rate Remains Offers on Worrying UK Growth Forecast
(Updated: 13:45, 8/6/22) The Pound US Dollar exchange rate remains on the backfoot this afternoon, following a warning that the UK economy will stagnate next year.
The Organisation for Economic Co-operation and Development (OECD) predicts the UK economy will grow 3.6% this year, down from its previous forecast of a 4.7% expansion.
The OECD also echoed the Bank of England (BoE) in predicting UK inflation will peak above 10% later this year.
The bleak forecasts are weighing on the Pound as they reinforce concerns over the UK’s economic trajectory.
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Pound US Dollar Exchange Rate Weakens on Brexit Woes
The Pound US Dollar (GBP/USD) exchange rate is on the backfoot this morning, undermined by renewed concerns over Brexit.
At the time of writing the GBP/USD exchange rate is trading at around $1.2530. Down roughly 0.5% from this morning’s opening levels.
Pound (GBP) Slumps amid Brexit Jitters
The Pound (GBP) is on the defensive against the US Dollar (USD) and the majority of its other peers this morning, amidst renewed concerns over Brexit.
Observers suggest Boris Johnson’s narrow victory in Monday’s no-confidence vote could push the PM to pursue more populist policies in order to win back the support of his MPs.
GBP investors fear this might see Johnson adopt a more hardline approach to the Northern Ireland protocol.
Simon Coveney, the Irish foreign minister, echoes these concerns:
‘If those divisions within the Conservative party impact on Ireland, because the prime minister or the British government decides in order to maintain support within the party that they have to take a tougher line on Brexit, or on the Northern Ireland protocol, well then obviously divisions in the Conservative party and in the British government impact on Ireland. And of course, that’s where we have a concern.’
Any move by Johnson to unilaterally change the NI protocol would undoubtedly stoke tensions with the EU. GBP investors fear this could even disrupt trade between the UK and EU. An outcome which would undoubtedly push the Pound sharply lower.
US Dollar (USD) Firms amid Cautious Market Mood
The US Dollar (USD) is strengthening this morning. The safe-haven currency being bolstered by a prevailing risk-off mood.
Inflation concerns and uncertainty over the war in Ukraine are currently the main factors supressing risk appetite as they stoke fears of a global recession.
Also buoying demand for the US Dollar is a solid pickup in US Treasury bond yields. The uptick in yields being underpinned by Federal Reserve rate hike expectations.
Pound US Dollar Exchange Rate Forecast: Slowing US Inflation to Weaken USD?
The primary catalyst of movement in the Pound US Dollar exchange rate in the second half of the week is likely to be publication of the US consumer price index.
Economists predict Friday’s CPI release will report US inflation dipped again in May. Another slowing of inflation may weaken the US Dollar as it is likely to stoke speculation the Fed will pause its current tightening cycle after the summer.
With domestic data thin on the ground, the Pound is likely to remain sensitive to UK political developments.
This may see the fallout from Monday’s no-confidence vote continue to infuse volatility into GBP exchange rates.