Pound US Dollar (GBP/USD) Exchange Rate Hits Two-Year Low on UK GDP and Brexit Worries

Pound US Dollar (GBP/USD) Exchange Rate Slips on GDP, Brexit and Risk-Off Mood

The Pound US Dollar (GBP/USD) exchange rate slid today as a contraction in UK GDP and a risk-averse tone among markets dragged GBP/USD to a two-year low.

Tomorrow could potentially bring positive data for both currencies, so we may see the GBP/USD pair waver.

Pound (GBP) Tumbles as UK Economy Contracts

The Pound (GBP) slipped this morning following the UK’s latest GDP figures, which revealed an unexpected 0.3% contraction in April. Economists had expected the UK economy to grow by 0.1%.

Although analysts have pointed out that the decline in the services sector was due to the end of the NHS test and trace scheme, the results are nonetheless worrying.

In addition, the UK’s proposed plans to scrap parts of the Northern Ireland protocol helped to push GBP/USD even lower.

The government will publish a controversial bill today that, if passed, would allow it to suspend parts of the protocol agreement. The EU has said that such actions would be unacceptable. Analysts are worried that the dispute could result in a damaging UK-EU trade war.

US Dollar (USD) Enjoys Risk-Averse Trade

Meanwhile, the safe-haven US Dollar (USD) is enjoying a risk-off market mood today and ongoing tailwinds from last week’s surprise rise in US inflation.

The American CPI came in hot on Friday, sparking fresh bets for aggressive action from the Federal Reserve. Markets had been speculating that the Fed would pause its tightening cycle. However, with inflation unexpectedly hitting a fresh 40-year high, rate rise bets are back on.

This has contributed to a bearish theme in markets as tighter policy from the Fed could weigh on the global economy.

Investors are also concerned about slowing economic growth elsewhere, including in the UK, and a fresh outbreak of Covid in China. Just weeks after Beijing lifted lockdown restrictions, China’s capital is having to reimpose some measures. Markets fear that this could further hamper growth in the world’s second-largest economy and disrupt supply chains. The downbeat mood is supporting USD.

Pound US Dollar Forecast: UK Unemployment Rate to Support Sterling?

Turning to tomorrow, the UK’s latest unemployment rate may offer the Pound some much-needed support. Forecasters expect the unemployment rate to fall from 3.7% to 3.6%, indicating that – despite the UK’s economic headwinds – the labour market remains strong.

For USD, the latest US PPI is in focus. After US inflation exceeded forecasts last week, a hotter-than-expected PPI could boost the ‘Greenback’.

Samuel Birnie

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