Pound US Dollar (GBP/USD) Exchange Rate Firms amid Fears of US Economy Slowing
(Updated 4/7/23, 16:30)
The Pound US Dollar (GBP/USD) exchange rate is strengthening this afternoon as the market is expecting the US economy to cool significantly by the end of the year, despite the near-term prospect of further tightening. Economists at Rabobank commented:
‘While stronger-than-expected data could boost the prospect of another Fed rate hike beyond July and underpin the USD near-term, the likelihood that the US economy will be slowing into year-end will continue to colour the outlook for the (US Dollar).’
At time of writing, the GBP/USD exchange rate is around $1.2731, a 0.31% jump from this morning’s opening levels.
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GBP/USD Exchange Rate Fluctuates amid Economic Uncertainty
The Pound US Dollar exchange rate is trading narrowly as concerns mount over the economic stability in both the UK and US.
At time of writing, the GBP/USD exchange rate is around $1.2707, relatively unchanged from this morning’s opening levels.
Pound (GBP) Pressured by Economic Uncertainty
The Pound (GBP) remains undermined by fears of a looming recession. With investors concerned that the Bank of England (BoE) could tip the UK into a recession due to relentless tightening, Sterling is struggling for support.
A lack of major economic data is leaving the Pound exposed to market sentiment and economic uncertainty. With inflation remaining sky high, the central bank is left with little choice but to continue their tightening cycle. Some GBP investors are now expecting another 50bps interest rate hike in August as inflation remains the highest amongst G7 countries, and far above the BoE’s target rate of 2%. Economists at Rabobank said of the situation:
‘Despite widespread expectations about the potential extent of BoE rate hikes in the month ahead, in our view, GBP’s upside will be limited by concerns that tighter monetary policy also enhances growth risks. As demonstrated on several occasions last year, BoE rate hikes do not always lift the Pound.’
Elsewhere, welcome news of food inflation finally easing could support Sterling. Amidst the turmoil of the cost-of-living crisis, Sainsbury’s reported that food inflation had eased to 15.4% in May. Despite impacting rate hike bets from the BoE, the economic stability of the UK appears to be concerning investors more.
US Dollar (USD) Undermined by Disappointing Manufacturing PMI
Meanwhile, the US Dollar (USD) is relatively quiet this morning as the US markets are closed for the Independence Day holiday. However, with the weaker-than-expected ISM manufacturing PMI released yesterday, concerns are growing over stuttering factory activity.
Economic activity in the US contracted at the fastest pace since May 2020. Against expectations of 47, manufacturing PMI fell to 46 from 46.9 as business optimism wanes. Timothy Fiore, Chair of ISM, commented on the data:
‘The U.S. manufacturing sector shrank again, with the Manufacturing PMI losing ground compared to the previous month, indicating a faster rate of contraction.
‘Demand remains weak, production is slowing due to lack of work, and suppliers have capacity. There are signs of more employment reduction actions in the near term.’
Pound US Dollar Exchange Rate Forecast: Hawkish FOMC Minutes to Boost the US Dollar?
Looking ahead, the Pound US Dollar exchange rate could see further movement with tomorrow’s release of the latest Fed policy meeting minutes. In the wake of downbeat US data, the Federal Open Market Committee (FOMC) minutes could give investors a glimpse into the central bank’s next move.
As for the Pound, an expected slowdown in the services PMI could weigh further on Sterling. Expectations of services PMI continuing to slow for the third consecutive month as momentum appears to be slowing.