Pound US Dollar Exchange Rate Plummets amid IMF Warning
The Pound US Dollar (GBP/USD) exchange rate is plunging as the IMF predicts a third of the world to be in recession. Economists warn that the UK is set to face the worst and longest recession of the G7.
At time of writing the GBP/USD exchange rate is trading around $1.1950, a 0.80% fall from this morning’s opening levels.
Pound (GBP) Undermined by Dire 2023 Forecast
The Pound is struggling for support this morning as the relentless domestic headwinds are compounded by downbeat economic forecasts. The International Monetary Fund (IMF) have given a stark warning for 2023 as it predicts a third of the world to enter a recession.
2023 is expected to be even ‘tougher than the year we left behind’, claims IMF Managing Director Kristalina Georgieva. She adds that with three of the biggest economies of US, China, and Europe all slowing down, recession is inevitable. Georgieva added:
‘We expect one-third of the world economy to be in recession. Even countries that are not in recession, it would feel like recession for hundreds of millions of people.’
Meanwhile, the Financial Times has released an annual survey of UK economists that paint a grim picture for the year ahead. The vast majority warns that the inflationary shocks caused by the Ukraine conflict and the Covid pandemic will persist longer in the UK than elsewhere. With the Bank of England (BoE) maintaining their staunch position of raising interest rates high, coupled with the government’s tax hikes, the UK economy is set to remain under intense pressure. John Philpott, an independent labour market economist, commented:
‘The 2023 recession will feel much worse than the economic impact of the pandemic.’
US Dollar (USD) Buoyed by Safe-Haven Flows
Meanwhile, the US Dollar opens 2023 in much the same fashion as how it ended; amidst a gloomy market sentiment. With fresh fears over China’s surging Covid cases threatening to destabilise the already shaky economy, the ‘Greenback’ is enjoying renewed safe-haven flows.
Troubling data out of China further propped up the US Dollar as Caixin Manufacturing PMI fell into contraction territory for December. Despite coming in higher than forecasts, the manufacturing sector fell to its lowest level since September. The reading marked the fifth straight month of declining activity as soaring Covid cases disrupted production and hampered demand.
A cautious market mood to start the new year could provide further support to the US Dollar, as could the resilient US economy. Georgieva is cautiously optimistic that the US could in fact avoid a recession. She added:
‘(The) US is most resilient. We see the labour market remaining quite strong. This is a mixed blessing because if the labour market is very strong, the Fed may have to keep interest rates tighter for longer to bring inflation down.’
Pound US Dollar Forecast: UK Borrowing Data to Sour Sterling?
Looking ahead, the Pound US Dollar exchange rate could see further movement with the release of lending data from the BoE. Consumer credit and mortgage data could further highlight the cost-of-living crisis. Households are increasingly having to turn to borrowing more to stay afloat. A recent cooling of the housing market could also see mortgage approval rates fall for the fourth consecutive month.
Meanwhile, the US Dollar could see some modest movement with the release the Federal Open Market Committee (FOMC) minutes. Any further hints towards the Federal Reserve’s monetary policy going forward could inspire movement.