Pound US Dollar (GBP/USD) Exchange Rate Remains Low amid Souring Market Mood

Pound US Dollar (GBP/USD) Exchange Rate Remains Low amid Souring Market Mood

Article updated 16:38, 5/9/2023:

The Pound US Dollar (GBP/USD) exchange rate has been unable to recover over today’s session, despite a modest rebound.

The souring market mood is bringing safe-haven flows to the ‘Greenback’, which leaves the increasingly risk-on Sterling unable to gain ground back.

The continued perception that the UK economy is edging closer to recession is adding further pressure to GBP. The morning’s confirmation of a contraction in the service sector stoked recession anxieties amongst investors.

At the time of writing, GBP/USD is trading at around US$1.2568, a fall of just over 0.4% from the morning’s opening rates.

Original article continues below:

Pound US Dollar (GBP/USD) Exchange Rate Crumbles amid UK Service Sector Contraction

The Pound US Dollar (GBP/USD) exchange rate is dropping this morning, following confirmation of a contraction in the UK service sector.

At the time of writing, GBP/USD is trading at around US$1.2547, a fall of roughly 0.6% from the morning’s opening rates. Furthermore, this has seen GBP/USD fall to its lowest levels in two months.

Pound (GBP) Slides as Service Sector Contracts

Despite printing above forecasts, the final service sector PMI reading is sapping sentiment towards the Pound (GBP) this morning.

The reading confirmed the fastest slowdown in the vital sector since January, as demand continues to weaken amid higher interest rates.

Printing at 49.5, this shows a drop from 51.5 in July and indicates a contraction in the sector. This is likely fuelling recession anxieties amongst GBP investors, as it follows downbeat manufacturing news last month.

Tim Moore, Economics Director at S&P Global Market Intelligence, commented:

‘After a modest recovery over the past six months, service sector businesses are now clearly feeling the impact of rising interest rates on client demand. Worries about the broader business climate also dampened spending in August, with firms suggesting that faltering UK economic growth and sticky inflation were weighing on the outlook.’

Furthermore, the downbeat market mood is likely denting Sterling further. As the currency holds an increasingly risk-sensitive nature, these shifts towards bearish trade can weaken the currency.

US Dollar (USD) Rises amid Risk-Off Mood

The US Dollar (USD) is rising this morning, as a downbeat slate of Chinese data sours the market mood.

After yesterday’s wave of optimism towards the economic superpower subsides, markets are focused on this morning’s Caixin PMI data.

The index printed below expectations, coming in at 51.8 for August versus forecasts of 53.6. This indicates significant slowdown in the sector, and casts further doubts towards China’s post-Covid recovery.

Dr Wang Zhe, Senior Economist at Caixin Insight Group, commented:

‘“Overall, the manufacturing sector improved in August, the services sector grew at a slower pace, and there was still considerable downward pressure on the economy. At the beginning of the third quarter, economic indicators, including those for consumption, investment and industrial production, were again lower than market expectations.’

As such, the ‘Greenback’ is benefitting from an influx of safe-haven flows. These are serving to strengthen USD against riskier assets such as the Pound.

Pound US Dollar Exchange Rate Forecast: US ISM Services PMI in Focus

Looking ahead for the US Dollar, the core catalyst of movement is likely to be tomorrow’s ISM services PMI. Economists forecast a slowdown in the vital sector, but only from 52.7 to 52.5.

This could weigh on the ‘Greenback’ but may only prompt modest weakness. However, if the index falls more than forecast it could dent USD rates significantly.

For the Pound, the data calendar is set to remain light in the short term. Because of this, Sterling is likely going to be left exposed to shifts in risk appetite.

John Mulcahey

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