Pound US Dollar (GBP/USD) Exchange Rate Extends Losses Amid ‘Fire Sale’ of UK Assets

Pound US Dollar Exchange Rate Crunches Lower, Sterling Morale Falls Off a Cliff

(Updated 13:45, 23/09/2022) The Pound US Dollar (GBP/USD) exchange rate fell further still this morning as GBP morale scrapes the bottom of the barrel. Economists’ analyses are consistently downbeat, with some forecasting Pound parity against USD.

Fiona Cincotta at City Index echoes several other experts in her observation:

‘Far from soothing concerns over the outlook for the UK economy, Liz Truss and Kwasi Kwarteng’s economic plan for the UK has sent the pound plunging. The announcement of the largest tax cuts since 1972 to boost growth and stave off a recession that has already started, has triggered a crash in the pound and the bond market.’

Others have called the UK’s asset sell-off a ‘fire sale’, as markets consider the implications of government borrowing on a mass scale. UK government bonds have taken the brunt of fears that economic growth in the months to come won’t come close to recouping government debt.

The yield on two-year UK gilts has climbed rapidly by 37 basis points, reaching its highest level since the financial crisis of 2008. Trevor Greetham, head of Multi Asset at RLAM, has commented that the Chancellor’s package would have made more sense back then:

‘A significant, unfunded fiscal stimulus package like this would have made economic sense after the deflationary Global Financial Crisis, when borrowing costs were low and private sector balance sheets were deleveraging. Now with spare capacity non-existent, inflation at a forty year high and the Bank of England trying to cool things down, we are likely to see a policy tug of war reminiscent of the stop-go 1970s.’

Original article continues below:

GBP/USD Exchange Rate Plummets as UK Inches Teeters on Brink of Recession

The Pound US Dollar (GBP/USD) exchange rate is plunging this morning as UK investors trade bearishly on volatile economic conditions. Meanwhile, the US Dollar is trading at 20-year highs against a basket of other currencies.

At the time of writing, GBP/USD is trading at $1.1162, down 0.9% from today’s opening levels.

Pound (GBP) Sentiment Hits Rock-bottom as Kwarteng Unveils Mini-Budget

The Pound (GBP) is experiencing significant headwinds today as markets are sceptical that the UK’s mini-budget announcement will provide rock-solid solutions to the country’s cost-of-living crisis. To fund support packages, experts worry that government borrowing will reach unsustainable levels.

MUFG bank sum up the general mood in a statement saying the Pound may fall on government policies which ‘lack credibility’; financing the budget and current account deficit together looks to cost around 15% of UK GDP.

Expanding on the theme, Richard J Hunter of Interactive Investors says:

‘It is expected that the government will unveil a new “fiscal event” later in a mini-budget which should involve tax cuts and increased spending in an attempt to stimulate growth. It remains to be seen how effective such moves might be, given the wider pressures affecting economies globally.’

Others are more confident, however: Simon Clarke, the Secretary of State for Levelling Up, told news outlets that ‘this isn’t a gamble, the weight of history and evidence is with us.’ Clarke explained, ‘the evidence of the 1980s and the 1990s is that a dynamic low tax economy is what delivers the best growth rates.’

Until the announcement is made, it is unlikely Sterling will make any decisive upward movement.

US Dollar (USD) Thrives Amid Volatile Trading Conditions

The US Dollar is trending up this morning as PMI data from Australia, Germany and the wider Eurozone prints mixed. Economic activity reports reflect unsteady trading conditions caused by intermittent geopolitical tensions and fears of a global recession.

Such risk-off factors lend safe-haven support to the ‘Greenback’, while capping gains for perceived-risker currencies.

Meanwhile, bullish expectations for the Federal Reserve bank underpin strength in the US Dollar, as other central banks strike a more dovish note. The Bank of England (BoE) hiked interest rates by 50bps yesterday as opposed to the 75bps expected, compared with a three-quarter percentage point rise from the Fed.

In its policy decision statement, Fed policymakers signalled that the US central bank will likely perform more aggressive interest rate increases ahead to cap inflationary pressures. Such rhetoric buoyed the US Treasury bond yields, spurring a USD uptrend.

‘My main message has not changed since Jackson Hole,’ said Fed Chairman Jerome Powell on Tuesday; ‘The FOMC is strongly resolved to bring inflation down to 2%, and we will keep at it until the job is done.’

GBP/USD Exchange Rate Forecast: Mini-Budget to Drive Movement?

Looking ahead, UK Chancellor Kwasi Kwarteng’s mini-budget statement is likely to be the main mover of Sterling exchange rates today. Depending on the perceived credibility of Kwarteng’s proposals, GBP could trend up on the prospect of a solution to the UK’s living standards crisis, or else drop on fears of further hardship ahead.

Opening the speech, Kwarteng begins by calling the Bank of England’s independence ‘sacrosanct’, which may provide some support to the Pound.

Elsewhere, PMI data from the UK prints mixed and investors await the US release this afternoon. If risk-off headwinds persist, USD is likely to extend its climb regardless of whether the data prints above or below expectations.

Olivia Evershed

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