Pound US Dollar (GBP/USD) Exchange Rate Trends Lower as UK Recession Threatened
The Pound US Dollar (GBP/USD) exchange rate weakened over the course of last week, depressed by forecasts of a UK recession prompted by disappointing data. Meanwhile, bold comments from the Federal Reserve at the Jackson Hole Symposium propelled the US Dollar (USD) higher.
At the time of writing, GBP/USD is trading at $1.2575, having climbed by over a full percentage point compared with this time last week.
Pound (GBP) Morale Dented as Economists’ Forecasts are Bleak
The Pound (GBP) weakened against the US Dollar and several other peers last week as gloomy predictions from UK economists undermined investors’ confidence.
A weak set of PMI data midweek, combined with abysmal sales figures from the Confederation of British Industry (CBI), led experts to remark:
‘The fight against inflation is carrying a heavy cost in terms of heightened recession risks. A renewed contraction of the economy already looks inevitable…’
PMIs for manufacturing and the service sector in August printed at 42.5 and 48.7 respectively; below forecasts of 45 and 51. That business activity is lingering in contraction territory accords with widespread concern over the economic outlook and the impact of elevated borrowing costs.
Moreover, the CBI’s retail sales balance reinforced expectations of reduced consumer spending, indicating that trade has fallen at the swiftest pace since March 2021.
Outlining further threats to Pound stability ahead, Martin Sartorius of the CBI said:
‘Against a backdrop of rising interest rates and weak demand, retailers foresee cuts to investment over the next year, while employment is expected to fall again next month.’
US Dollar (USD) Buoyed by Jackson Hole Optimism
The US Dollar enjoyed tailwinds last week as hawkish Fed rhetoric reinforced the notion that interest rates need not start coming down immediately.
Speaking on Tuesday, Richmond Fed President Thomas Barkin said the bank must be open to the possibility that the economy will begin to reaccelerate rather than slow, potentially causing the Fed to reevaluate its policy tightening stance.
Barkin told reporters: ‘If I got convinced that inflation was remaining high and demand was giving no signal that inflation was going to come down, that would make the case [for further tightening of monetary policy through higher interest rates].’
Disappointing PMI data midweek weighed briefly on the currency: manufacturing fell deeper into contraction territory while services activity weakened by more than expected. USD/GBP regained momentum in the second half of the week, however, despite worse-than-expected durable goods data.
An unexpected fall in initial jobless claims likely helped boost the US Dollar: the number of Americans filing for unemployment unexpectedly fell by 10,000, dropping to near six-month lows.
Moreover, hawkish comments from Fed Chairman Powell in concluding the Jackson Hole Symposium lent additional support. Powell said that the economy hadn’t cooled down as expected, remarking ‘there is no way to know what the neutral rate would be’; prompting markets to bet on another hike in 2023.
GBP/USD Exchange Rate Forecast: US Inflation Data to Direct Movement?
Into next week, the Pound US Dollar exchange rate is likely to trade according to US data, given the scarcity of UK economic stimuli.
While speakers from the Bank of England (BoE) may influence Sterling movements on Thursday, GBP/USD is more likely to experience headwinds relating to the Fed’s preferred measure of US inflation: the PCE price index.
The index is forecast to have inched up slightly on an annualised basis, likely quieting rumours of impending interest rate cuts. If the Fed are considered likely to keep rates on hold, it is probable the ‘Greenback’ will experience tailwinds.