Pound US Dollar (GBP/USD) Extends Downside as UK Outlook Deteriorates
(Updated 16:30, 31/8/22) The Pound US Dollar (GBP/USD) exchange rate continued its decline today, hitting its lowest level since March 2020. Through this month, GBP/USD has fallen from around $1.2278 to $1.1609 – a depreciation of over 5%.
Today, all the pressures that have been weighing on the Pound (GBP) continued to mount. The UK is set to enter a recession in the final quarter of this year while inflation could soar above 20%.
Meanwhile, political instability exposes the economy to further risks and ongoing strike action hints at festering social unrest.
At the same time, expectations of higher interest rates, a long recession and increased government spending are pushing bond yields up to multi-year highs. With government debt interest levels soaring, whoever becomes Prime Minister next week will have yet another economic challenge to contend with.
With the UK’s outlook deteriorating rapidly, Sterling faced heavy selling pressure.
Meanwhile, hawkish comments from Federal Reserve policymaker Loretta Mester helped the US Dollar (USD) climb. Mester reiterated the Fed’s commitment to bringing down inflation, saying that they need more data before confirming that it has peaked. She also signalled that another 75-bp rate rise is still very much on the table at the Fed’s next meeting.
Poor employment figures may have capped USD’s gains. The latest ADP employment change figures, which had been postponed since May as ADP adjusted its report methodology, showed an unexpected slowdown in employment from June through to August.
Original article continues below:
Pound US Dollar (GBP/USD) Exchange Rate Down as UK Economic Woes Grow
The Pound US Dollar (GBP/USD) exchange rate was on the back foot this morning as worries about the UK economy continue to dog the Pound (GBP).
At the time of writing, GBP/USD is trading around $1.1647, down from a high of $1.1693 touched earlier this morning.
Pound (GBP) Stumbles as UK Business Confidence Slumps
The Pound slipped as today’s European session began as economic headwinds continue to batter the UK.
Lloyds Bank’s latest Business Barometer report found that business confidence slumped by nine points, from 25% in July to 16% in August – its lowest level since March 2021.
UK firms are increasingly anxious about surging inflation, particularly energy and raw materials costs. They also see a bleak future ahead, with confidence in trading prospects declining by 11 points.
Meanwhile, further strike action is on the way. The Transport Salaried Staffs’ Association (TSSA) announced a 24-hour walkout among rail staff on 26 September.
This is the latest in a wave of strikes sweeping the country as workers demand higher pay in the face of soaring inflation. Industrial action is bad for the Pound as it causes economic disruption at an already troubling time. It also indicates growing unrest, potentially signalling more political instability to come.
These factors are weighing on Sterling today, sending it lower against many of its peers.
US Dollar (USD) Rises in Risk-Off Trade
Meanwhile, the US Dollar (USD) is rising today as a risk-off market mood lifts the safe-haven ‘Greenback’.
Russian energy giant Gazprom has halted gas supplies via the Nord Stream 1 pipeline, which it claims requires maintenance.
Russia’s Gazprom says it halted gas transportation via Nord Stream 1 – Reuters
View more: https://t.co/lTXh1dzMi0#Ainvest #Ainvest_Wire #Trade #USStock #Economic pic.twitter.com/a9AqhATnKI— AInvest Wire (@Ainvest_Wire) August 31, 2022
The cessation of supplies is the latest disruption to European gas imports amid worries that a shortage of gas and surging energy prices could trigger recessions in the UK and the Eurozone this year.
The troubles in Europe add to an increasingly bleak outlook on the global economy, with surging costs, geopolitical tensions and extreme weather events all causing concern.
Additionally, the US Federal Reserve looks set to continue hiking interest rates. This is increasing anxiety among investors who fear a prolonged period of restrictive financial conditions and a potential US recession. It’s also boosting the US Dollar, as higher interest rates increase the appeal of the currency.
GBP/USD Exchange Rate Forecast: Further Losses Ahead?
As the day progresses, the UK’s downbeat outlook could continue to weigh on the Pound. One unlikely factor that could support Sterling is any reassurance from the UK government that it has the cost-of-living crisis under control. However, markets have found the government’s response lacking as it postpones any policy interventions until after the Tory leadership contest is over.
For the US Dollar, a speech from Fed official Loretta Mester could prompt more gains. If Mester echoes recent hawkish comments from her colleagues, USD could climb.
The US ADP employment change figures are also out today, giving an early indication of the health of the US labour market ahead of the non-farm payrolls on Friday. A strong result will likely provide further tailwinds for USD.