Pound US Dollar (GBP/USD) Exchange Rate Slides amid UK Recession Woes
(Updated 15:25, 3/11/22) The Pound US Dollar (GBP/USD) exchange rate plunged today as the Bank of England (BoE) warned that the UK had entered a recession.
The bank raised interest rates by 75bps – its largest hike since 1989 – but signalled that the pace of tightening was likely to slow. BoE Governor Andrew Bailey said that the terminal rate would likely peak below market expectations, thereby denting the Pound (GBP).
In addition, the bank said that it believes the UK economy slipped into recession this quarter and that the downturn will last until mid-2024.
The decision is in stark contrast to the situation in the US. Last night the Federal Reserve also hiked rates by 75bps, but it signalled more rate rises to come. Meanwhile, the US economy looks resilient.
This contrast in monetary policy and economic outlook weighed heavily on GBP/USD today. At the time of writing, the Pound Dollar pair is trading at around $1.1210, down around 2.9% on the day.
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Pound US Dollar (GBP/USD) Exchange Rate Tanks amid Risk-Off Mood and Recession Fears
The Pound US Dollar (GBP/USD) exchange rate plunged to a two-week low this morning as a risk-off mood and concerns about the UK economy battered the GBP/USD pair ahead of the Bank of England (BoE) interest rate decision.
At the time of writing, GBP/USD is trading at around $1.1249, down almost 2.7% from this week’s high.
Pound (GBP) Slumps as BoE Decision Looms
The Pound (GBP) plummeted as European trade opened this morning as recession worries weigh on Sterling ahead of the BoE interest rate decision.
Recent downbeat economic data has indicated that the UK economy may already be contracting. Despite this, the BoE looks set to hike interest rates by 75bps – the largest rise since 1989 – as it battles decades-high inflation.
Higher interest rates tend to choke off economic growth, so raising rates during a recession can be incredibly damaging.
In addition, another rate hike will push mortgage repayments even higher, raising fears of a housing market crash next year. And this morning UK government bond yields jumped, putting an even greater burden on the public finances.
An upward revision to the UK’s services PMI this morning seems to have failed to prop up the Pound. The survey score printed at 48.8, rather than 47.5. Although higher than preliminary estimates, this still signifies a contraction in the UK’s vital services sector.
US Dollar (USD) Boosted by Hawkish Fed
Meanwhile, the US Dollar (USD) is holding strong today after surging higher last night following the Federal Reserve interest rate decision.
Markets were expecting the Fed to deliver another 75bps rate rise but to signal a slower pace of policy tightening in the future. These expectations were proved true, and USD dropped as markets began to pare back bets for future rate rises.
However, Fed Chair Jerome Powell swooped in with some hawkish comments, which saw USD rally and stock markets drop.
The Fed chief said that, while the pace of hikes could slow in the future, it was still ‘very premature’ to discuss pausing the tightening cycle. He warned that the terminal rate would likely be higher than previously expected, and would stay higher for longer, adding:
‘We have ways to go when it comes to raising interest rates, and we will ensure financial conditions are tight enough to bring economic activity and inflation down.’
This is continuing to provide USD with a tailwind through into today’s session, while the subsequent risk-off mood is also supporting the safe-haven US Dollar.
GBP/USD Exchange Rate Forecast: BoE Decision to Trigger Volatility?
The focus today is the BoE meeting. While markets expect a 75bps hike, there’s some uncertainty around the decision due to the delay of the government’s fiscal statement and the accompanying forecasts from the Office for Budget Responsibility (OBR).
Amid the prospects of tighter fiscal policy and without the latest forecasts, BoE policymakers may opt for caution. A smaller 50bps rate hike could dent Sterling, while the expected 75bps move could boost it.
That said, there are serious concerns about the impact of higher interest rates on the UK’s slowing economy. As the bank tightens monetary conditions, it further restricts the economy, which already seems to be in recession. As a result, we could see some volatility in GBP today, whatever the bank decides to do.
As for the US Dollar, a raft of US data today could prompt movement. In particular, the ISM services PMI is in focus. Economists expect a modest slowdown in US service sector activity, which could dent USD. However, recent data has exceeded forecasts. Could a stronger-than-expected PMI push the US Dollar even higher?