Pound US Dollar Exchange Rate Softens as BoE Intervenes amid Market Fears
The Pound US Dollar (GBP/USD) exchange rate dipped this morning as the Bank of England (BoE) staged a second intervention this week.
At time of writing the GBP/USD exchange rate is trading around $1.048, relatively unchanged from this morning’s opening levels.
Pound (GBP) Subdued amid Dysfunctional Markets
The Pound struggled for demand this morning as the BoE widens emergency bond buying amid a backdrop of gilt market chaos.
The central bank intervened for the second time this week as it attempts to calm the volatile market. Fears of threatening the financial stability of the UK, the BoE hopes that expanding its bond market support will restore orderly market conditions. The central bank warns:
‘Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.’
Meanwhile, the Office for National Statistics (ONS) reported that the unemployment level fell below expectations. Dropping to a new low since 1974, the unemployment rate fell to 3.5%. However, economic activity increased by 252,000, the largest increase since 1971. The drop was driven by a record number of people leaving the labour market. Ruth Gregory, economist at Capital Economics said:
‘While there were tentative signs that the labour market is cooling from the red-hot conditions seen in recent months, the shortfall in labour supply is keeping it exceptionally tight.’
Elsewhere, Chancellor Kwasi Kwarteng will face questions today in parliament over spending cuts. The Institute of Fiscal Studies have said that the UK needs cuts of over £65bn to stabilise debt. With Kwarteng’s medium-term fiscal plan being brought forward to 31st October, investors are waiting for how the government intends to finance its growth plan.
US Dollar (USD) Strengthens on Risk-Averse Market
Meanwhile, the US Dollar continued its rally as the US Dollar Index is trading at its highest level in ten days. Rising interest rates and escalating geopolitical tensions kept investors nervous.
The International Monetary Fund (IMF) yesterday warned of the growing risk of a global recession, bolstering safe-haven flows to support the ‘Greenback’. Risk appetite remains as the IMF’s Managing Director Kristalina Georgieva issued a warning that central banks need to act decisively. However, she also warned that despite the relative strength of the US labour market, but it is losing momentum.
Elsewhere, expectations of further aggressive rate hikes are lending considerable support to the US Dollar. Continued hawkish rhetoric from the Federal Reserve bolsters expectations of further interest rate hikes, keeping ‘Greenback’ demand strong.
Pound US Dollar Forecast: Falling Consumer and Business Confidence to Dent the US Dollar?
Looking ahead, the Pound US Dollar exchange rate could see further fluctuations with the release of the NFIB business optimism index and consumer inflation expectations. Forecasts of falling confidence could temper rate hike expectations, and in turn the ‘Greenback’.
Meanwhile, BoE speeches from Governor Andrew Bailey and Sir Jon Cunliffe could weigh on the Pound. Further comments on the central bank’s intervention in the market could sway investors.