GBP/USD Exchange Rate Drops on Broad-Based Sterling Weakness
(Updated 16:30, 07/09/2022) The Pound US Dollar (GBP/USD) exchange rate is falling lower this afternoon as upbeat comments from the UK’s new Chancellor of the Exchequer fail to lend the Pound a boost.
GBP is succumbing to pressure in part from strength in the US Dollar: Bank of England (BoE) Governor Andrew Bailey observed the dollar hit a 24-year high against the Japanese yen today, and has been testing a 20-year high against the euro.
Furthermore, a bleak outlook for the UK economy keeps the lid on bullish GBP sentiment, as the prospect of an energy price freeze suggests softening inflation, resulting in less aggressive BoE interest rate hikes. Moreover, such a measure – while expensive for the government – will likely fail to prevent poverty levels from rising.
Lady Stroud, director of Tory thinktank The Legatum Institute, warned that 1.3m people could fall into poverty this winter unless additional support is provided for those on the lowest incomes.
Supporting the US Dollar (USD) alongside risk aversion is a contraction of the US trade deficit, from $-80.9bn in June to $-70.7bn in July. While not quit meeting expectations, the data indicates a recovery in the country’s trade dynamics.
Original article continues below:
Pound US Dollar Exchange Rate Muted as Investors Digest Likely UK Support Measures
The Pound US Dollar (GBP/USD) exchange rate is trading in a narrow range this morning as investors await a speech from Bank of England (BoE) Governor Andrew Bailey at 10am BST. The Pound (GBP) is still under considerable pressure as markets assess the implications of Liz Truss’s instalment as Prime Minister.
At the time of writing, the Pound US Dollar is trading at $1.1497, down slightly from today’s opening levels.
Pound (GBP) Fluctuates as UK Support Measures Awaited
The Pound is trading in a mixed range against its peers this morning as investors assess the likely implications of an energy price freeze and targeted support measures for UK businesses.
New Prime Minister Liz Truss revealed yesterday that she was considering implementing support measures including capping energy bills for 18 months and spending £40bn on supporting small British businesses. Markets initially responded positively to the news.
Today, however, the critics are out in full force. The director of the Institute of Fiscal Studies (IFS) has expressed concern that the support package proposed is ‘very poorly targeted’. Paul Johnson remarks:
‘If this is a straightforward bill freeze then the majority of the money will go to better-off people who use more energy. Finding a way of targeting it to the many millions that really need it, without giving it to the many millions who don’t, appears to be something that has stumped the treasury and the government…’
Such downbeat analyses are capping gains for Sterling, while a cabinet reshuffle simultaneously inspires political uncertainty. Reporters are speculating upon likely new policies concerning such issues as migration and the environment.
Looking ahead, a speech from the BoE’s Andrew Bailey is likely to trigger subsequent movement in GBP exchange rates today.
US Dollar (USD) Wavers as Trade Deficit Expected to Shrink
The US Dollar (USD) is firming against several peers today but dipping against others as investors look to this afternoon’s balance of trade release for trading impetus.
A cluster of speeches from Federal Reserve policymakers Tom Barkin, Loretta Mester and Lael Brainard are likely to inspire some movement for the ‘Greenback’ later today. The outlook for Fed policy tightening remains hawkish, as markets price in a 75bps interest rate hike at the bank’s next meeting.
Not everyone is optimistic about the prospect of aggressive rate hikes, however. Tom di Galoma, managing director at Seaport Global Holdings in New York, comments:
‘You have all this fear that more rate increases are going to happen at the central bank level, inflation is not going to dissipate and then you’ve got the quantitative tightening that’s coming pretty rapidly.’
Elsewhere, USD is attracting some safe-haven support on account of headwinds in China due to ongoing Covid lockdowns. The country’s trade surplus shrank by more than expected in August amid weakening global and domestic demand.
Furthermore, Europe’s energy crisis keeps a lid on bullish trading sentiment: high energy prices in Germany, the bloc’s largest economy, has led to a contraction in the country’s industrial production.
Pound US Dollar Exchange Rate Forecast: BoE Speeches to Inspire Movement?
Looking ahead, the most immediate trading stimuli for the Pound are likely to be the speeches of Governor Andrew Bailey and other MPC members in Parliament this morning. Members will be asked about the central bank’s decision to raise interest rates by 50bp in August, as well as on the outlook for interest rates and the UK economy.
Later in the day, US data will probably affect USD exchange rates, with an improvement in the country’s trade balance likely to inspire tailwinds for the ‘Greenback’.