Pound US Dollar (GBP/USD) Exchange Rate Rebounds off One-Month Low amid Debt Ceiling Crisis Concerns

Pound US Dollar (GBP/USD) Exchange Rate Recovers as Debt Ceiling Fears Hit USD

(Updated 16:15, 23/05/23) The Pound US Dollar (GBP/USD) exchange rate rebounded after hitting a one-month low earlier as concerns about the US debt ceiling crisis spooked US Dollar (USD) investors.

President Joe Biden and House Speaker Kevin McCarthy have been trying to negotiate a deal to lift the US debt ceiling, with the Republican Speaker McCarthy demanding spending cuts for his party’s support. Recently, the two had described the talks as ‘productive’, raising hopes that a breakthrough was imminent.

However, reports emerged today that McCarthy told fellow Republicans in a closed-door meeting that they ‘are nowhere near a deal yet.’

Time is running out for the two sides to find a compromise before the US defaults on its debt – a historic event that could have catastrophic effects. Anxiety over the crisis saw USD drastically reverse its gains today.

Meanwhile, expectations for more Bank of England (BoE) interest rate rises seem to have helped the Pound (GBP) recover. Although the morning’s PMI surveys printed below forecasts, the services report showed ongoing inflationary pressures.

Furthermore, the International Monetary Fund (IMF) upgraded its growth forecasts for the UK economy. This also lent Sterling support.

At the time of writing, the GBP/USD exchange rate is trading at around $1.2425. This is marginally lower on the day, but 0.4% up from an earlier one-month low of $1.2372.

Original article continues below:

Pound US Dollar (GBP/USD) Exchange Rate Falls following Downbeat UK Data

The Pound US Dollar (GBP/USD) exchange rate fell sharply this morning after weaker-than-forecast UK PMIs dented the currency pairing.

At the time of writing, GBP/USD is trading at around $1.2378, it’s lowest level since mid-April and down 0.4% on the day.

Pound (GBP) Drops as PMIs Disappoint

The Pound (GBP) slumped against the US Dollar (USD) this morning after the UK’s latest PMIs missed forecasts.

The ongoing contraction in UK factory activity unexpectedly deepened, while the British services sector slowed more than anticipated. The results disappointed GBP investors, pointing to a cooling UK economy and a large divergence between manufacturing and services.

Signs of ongoing inflationary pressures in the services sector failed to boost Sterling by adding to Bank of England (BoE) rate rise bets.

Chris Williamson, Chief Business Economist at S&P Global – the firm that conducted the survey – commented:

‘[T]hese survey results are nothing but hawkish in suggesting the Bank of England has more work to do to quash stubbornly high inflationary pressures in the services economy.’

Expectations of more BoE hikes may have been offset by comments from the bank’s Governor Andrew Bailey. Bailey said that UK inflation has ‘turned the corner’, implying that interest rates may not need to rise further.

US Dollar (USD) Firms amid Risk Aversion and Fed Bets

Meanwhile, the safe-haven US Dollar is gaining ground amid a souring market mood and renewed Federal Reserve rate rise bets.

Equity markets are in the red this morning amid angst over the US debt ceiling and higher borrowing costs. This is boosting the appeal of the safer US Dollar.

In addition, hawkish comments from Fed policymakers last night have led to fresh bets on more rate hikes.

US Treasury yields – which often indicate Fed bets and boost the Dollar – rose sharply this morning, with the yield on the 10-year Treasury note hitting an 11-week high.

These factors are seeing the ‘Greenback’ strengthen today.

GBP/USD Exchange Rate Forecast: US PMIs to Dent the Dollar?

Looking ahead, Sterling may attempt to claw back some losses later in the session as the latest US PMIs are also expected to show negative results.

Although the S&P Global PMIs are less impactful than the ISM releases, they still have the potential to move the US Dollar. This could be bad news for the ‘Greenback’, as economists expect the surveys to show weakening private sector activity.

The services PMI is forecast to drop from 53.6 to 52.6. Meanwhile, US factory activity is set to have stalled this month. Signs of a cooling US economy could dent the Dollar.

However, risk appetite could also continue to play a part in the GBP/USD exchange rate. If the downbeat American data rattles markets then a risk-off mood could actually boost the safe-haven ‘Greenback’.

Samuel Birnie

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