Pound US Dollar Exchange Rate News: GBP/USD Tumbles as Greenback Accrues Risk-Off Support

Pound US Dollar (GBP/USD) Exchange Rate Falls on Debt Ceiling Crisis

The Pound US Dollar (GBP/USD) exchange rate weakened last week as a risk-off environment prevailed ahead of the US government’s debt ceiling negotiation deadline. As Democrats and Republicans struggled to come to an agreement, the risk of the government defaulting on its loan repayments loomed – sparking significant jitters amongst forex traders.

At the time of writing, GBP/USD is trading at $1.2344, having fallen by 0.8% over the past 7 days.

US Dollar Attracts Safe-Haven Tailwinds

Despite turbulence in the US economy, the US Dollar (USD) outperformed the majority of its peers last week. Buoying the currency were strong risk-off tailwinds on account of fears the US government would default on its loan repayments.

At the start of the week, the ‘Greenback’ faced mixed trading stimuli, wavering against its peers as US central bank representatives discussed inflation and the relationship between the US and China, in addition to the debt ceiling.

Of the former, Federal Reserve Chair Jerome Powell admitted that interest rates may not need to climb as high as initially thought, causing investors to dial back rate hike bets and weakening morale.

Into Tuesday, US PMI data printed mixed – but USD was able to climb amid ongoing risk-off sentiment.

Midweek, the US Dollar continued to climb, although investors were cautious of placing bullish bets ahead of the release of the latest meeting minutes from the Federal Open Market Committee (FOMC). Overnight, USD/GBP dipped slightly as markets digested news that:

‘If the economy evolved along the lines of [members’] current outlooks, then further policy firming after this meeting may not be necessary.’

Into Thursday, the ‘Greenback’ traded mixed as tensions ramped up ahead of the US debt ceiling deadline; Friday saw the currency subsequently fall, despite higher-than-expected PCE price inflation. Explaining markets’ mixed response, Priya Misra, Head of Global Rates Strategy at TD Securities, said:

‘The reason it’s still split is this idea of a skip, that some Fed officials feel they want a little more time. And that’s why they might skip in June and hike in July.’

Pound (GBP) Trades Erratically as Tailwinds are Compromised

The Pound (GBP) sank against the US Dollar last week, but firmed in other exchange rates as the UK’s economic outlook improved and investors were optimistic about further interest rate hikes from the Bank of England (BoE).

On Monday, GBP enjoyed moderate tailwinds as investors looked forward to a full week of trading stimuli. Tuesday saw the Pound weaken subsequently, as growth slowed in the UK’s service sector and the country’s manufacturing PMI contracted further rather than moving towards expansion territory.

Midweek, headline inflation exceeded forecasts, printing at 8.7%. Initially, GBP peaked just short of Monday’s 4-day high, but subsequently the currency fell as risk aversion countered tailwinds. Moreover, analysts considered the negative effect of persistent price pressures on the economy.

UK Chancellor Jeremy Hunt welcomed the fall in inflation, albeit smaller than expected, but remarked:

‘There are things underneath those numbers which show that this battle is far from over. We’ve got a long way to go.’

In the second half of the week, GBP crashed to a 13-month low as risk sentiment sank lower still and debt ceiling negotiations became urgent. On Friday, however, investors grasped tight to the possibility that a solution was in sight and markets embraced a much-needed confidence boost.

UK retail data also revealed that sales had partially recovered in April following March’s 1.2% decline, lending Sterling additional tailwinds.

GBP/USD Exchange Rate: US Data Dominates the Docket

A comparative lack of UK data leaves GBP/USD to trade on US economic stimuli this week.

A further decline in manufacturing according to the Dallas Fed could dent the ‘Greenback’, boosting the Pound US Dollar exchange rate. Subsequently, a tighter US labour market, indicated by fewer job openings, could suggest the Federal Reserve will be more receptive to rate hike suggestions – which may support the US Dollar.

On Thursday, reduced consumer borrowing in the UK might encourage a hawkish policy response from the BoE, if inflation is considered to be capping consumer spending and by extension, borrowing. Meanwhile, a disappointing ISM manufacturing PMI could subdue the ‘Greenback’.

At the end of the week, an increase in US unemployment would confirm suspicions of a tighter labour market. A lack of UK data may lend USD the upper hand, leaving GBP/USD to sink during Friday’s trade – unless external factors intervene.

Olivia Evershed

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