Pound Nosedives on Recession Forecasts, US Dollar Soars After Robust Jobs Data

  • Pound tumbles despite 0.5% BoE rate hike

  • UK energy bills forecast to rise above £4200

  • US Dollar climbs as economy adds 528000 jobs

  • Euro struggles amid continued recession fears

GBP/EUR Exchange Rate: Forecasts Predict Energy Bills to Soar Past £4200

The Pound Euro (GBP/EUR) exchange rate slumped over the past week. The UK’s cost-of living crisis combined with political uncertainty weighed upon Sterling throughout the week.

Forecasts released this week indicated that annual energy bills could climb above £4200 for UK households in January.

The ongoing Conservative leadership contest and resulting political vacuum has heightened uncertainty regarding the UK government’s approach to the crisis. Remaining candidates Rishi Sunak and Liz Truss have expressed diametrically opposed views to the issue. The current cabinet meanwhile has faced criticism from businesses and consumer advocates amid its lack of a concrete response.

The UK government’s response to soaring energy prices may prompt further movement in Sterling. The announcement of any financial support could help to bolster the Pound if it leads to improved spending power and business stability.

GBP/USD Exchange Rate: BoE Forecasts 13% Inflation and Recession

The Bank of England’s (BoE) interest rate decision and subsequent gloomy forecasts saw the Pound US Dollar (GBP/USD) exchange rate plummet in the second half of last week. The BoE’s 0.5% rate hike had largely been priced in ahead of Thursday’s meeting, meaning it had little impact.

The central bank went on to predict that inflation would climb above 13% in 2022, and that this will push the UK economy into a recession later in the year.

The downbeat forecasts have continued to cap Sterling’s upside potential into this week.

Looking ahead, GDP figures on Friday are forecast to show a contraction in the UK economy in June. This, along with a predicted slump to second quarter GDP growth, could exacerbate fears of a recession and see further losses for the Pound.

USD/GBP Exchange Rate: Above-Forecast Jobs Figures Bolster Fed Rate Hike Bets

The US Dollar (USD/GBP) exchange rate saw a boost over the past seven days. Initially, above-forecast PMI figures for the US services sector helped to boost the US Dollar. Hawkish rhetoric from Fed policymakers may have also helped to push USD higher.

Hotter-than-expected employment figures saw the US Dollar surge on Friday. Non farm payrolls figures reveal that 528000 jobs were added to the US economy in July. This was well above the forecast 250000.

Unemployment also bucked forecasts, edging lower to 3.5%. The robust jobs figures increased bets from investors on a 0.75% rate hike from the Fed which likely helped the currency to climb.

The US dollar has since relinquished a good portion of these gains as a prevailing risk-on mood sapped safe-haven demand.

A forecast rise in US inflation could increase Fed rate hike bets and prompt further gains for USD. Additionally, the release of FOMC minutes on Wednesday could add to speculation of the Fed’s forward policy if investors pick up on any notable comments.

EUR/USD Exchange Rate: Eurozone Private Sector Slowdown adds to Recession Fears

The Euro US Dollar (EUR/USD) exchange rate wavered over the past week but ultimately managed to tick higher.

Wednesday’s sharp increase to Germany’s trade surplus likely lent support to the single currency. Additionally, Thursday’s economic bulletin from the European Central Bank (ECB) may have also helped to bolster the single currency amid signals for further interest rate hikes.

Fears of a Eurozone recession saw EUR’s gains capped over the past seven days, however. Poor PMI figures for the Eurozone and Germany indicated a slowdown across all private sectors. A fall in Eurozone retail sales also weighed on the single currency, as well as the ongoing energy supply crisis.

An uptick to Eurozone GDP growth on Wednesday could strengthen confidence in the Euro if figures print as forecast. Any further losses to energy capacity could limit gains for the single currency, however.

Gareth Monk

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