Pound US Dollar (GBP/USD) Exchange Rate Slides as USD Stages Recovery

Pound US Dollar (GBP/USD) Exchange Rate Extends Decline as USD Gathers Strength

(Updated 16:20, 12/8/22) The Pound US Dollar (GBP/USD) exchange rate continued its decline today as worries about a UK recession weighed on the Pound (GBP).

Meanwhile, the US Dollar (USD) enjoyed some bullish momentum as it continued to recover its strength following the sell-off earlier in the week.

Although US inflation has shown signs of easing, Federal Reserve officials were quick to voice their commitment to further interest rate rises. In response, markets have been buying USD, which has now recouped nearly all its earlier losses.

Additionally, the latest US consumer sentiment index from the University of Michigan beat market forecasts. Economists expected the indicator to rise from 51.5 to 52.5, but instead it jumped to 55.1.

This was the second consecutive month of improving consumer morale as fears of a US recession recede and sky-high fuel prices steadily fall.

At the time of writing, GBP/USD is trading around $1.2125. While this is more than 1% below the week’s high of $1.2263, it’s also 0.6% higher than where the Pound US Dollar pair began when markets opened on Monday.

Original article continues below:

Pound US Dollar (GBP/USD) Exchange Rate Slips following UK GDP

The Pound US Dollar (GBP/USD) exchange rate slipped this morning as the latest UK GDP data confirmed a contraction in the UK economy in June.

At the time of writing, GBP/USD is trading around $1.2177, down marginally from this morning’s opening level of $1.2188.

Pound (GBP) Pressured after UK Economy Contracts

The Pound (GBP) is facing some selling pressure, although perhaps less than expected, after the UK economy contracted in June.

The latest GDP data from the Office for National Statistics (ONS) reveals that UK GDP shrank by 0.6% in June, which is far better than the expected contraction of 1.3%. The drop in GDP was caused primarily by the Queen’s platinum jubilee, which meant there were two fewer working days that month.

Looking at the quarter-on-quarter figures, UK GDP contracted 0.1% (versus the expected 0.2% contraction) while business investment unexpectedly rose 3.8% in the second quarter of 2022.

Despite these better-than-forecast results, economists remain worried about the UK’s outlook.

Derek Halpenny, Head of Research for Global Markets at MUFG Bank, commented:

‘The better June print doesn’t change the overall backdrop and won’t alter at all the BoE’s outlook and hence its policy outlook. The BoE was forecasting a rebound in third-quarter GDP before we enter the five-quarter period of GDP contraction and today’s data doesn’t change that.’

US Dollar (USD) Remains Muted after Softer US Inflation

However, the US Dollar (USD) currently seems unable to press the advantage as an upbeat market mood dampens the appeal of the safe-haven currency.

In addition, the ‘Greenback’ also faces reduced support following signs that US inflation is cooling. Headline inflation and producer prices both eased more than expected last month, prompting traders to rein in Federal Reserve rate hike bets.

This continues to act as a headwind for the US Dollar today.

GBP/USD Exchange Rate Forecast: GDP Analysis Continues

Looking ahead, we could see more movement in GBP/USD as markets digest the GDP data. Economist James Smith has said the second-quarter GDP results are ‘very hard to read’, so new comments and analyses may emerge as experts comb through the data.

The UK’s economic situation must also be considered alongside its political situation. Any hints at upcoming fiscal support for struggling families may impact the Pound.

Later this afternoon we have the latest US consumer confidence index from the University of Michigan. Economists expect another rise in morale, which may support USD.

Samuel Birnie

Contact Samuel Birnie


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