Pound US Dollar (GBP/USD) Exchange Rate Tumbles as US Data Boosts Fed Bets
(Updated 16:35, 06/09/23) The Pound US Dollar (GBP/USD) exchange rate plunged this afternoon after strong US economic data boosted bets on more policy tightening from the Federal Reserve.
America’s latest ISM services PMI smashed forecasts, with business activity unexpectedly accelerating in August. The score printed at a six-month high of 54.5, rising from 52.7 and beating forecasts of 52.5.
These signs of robust demand and activity in the US services sector suggest that the American economy remains resilient. As a result, the Fed has more room to raise interest rates, and fresh bets boosted the US Dollar (USD).
Meanwhile, the Pound (GBP) faced headwinds amid warnings about the dire outlook for the UK economy.
Dovish comments from Bank of England (BoE) Governor Andrew Bailey added to GBP’s woes in the afternoon. Bailey reiterated his expectation that UK inflation will fall significantly by the end of the year, which led to a slight pullback in BoE rate hike bets.
At the time of writing, GBP/USD is trading at around $1.2496, near its lowest levels in three months and down 0.5% on the day.
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Pound US Dollar (GBP/USD) Exchange Rate Wobbles amid Warning Signs for UK Economy
The Pound US Dollar (GBP/USD) exchange rate fluctuated slightly lower at the start of today’s European session, with the pairing licking its wounds after striking a three-month low yesterday.
At the time of writing, the GBP/USD exchange rate is trading at $1.2558, down from $1.2587 at the start of today’s session.
Pound (GBP) Pressured by UK Economic Woes
The Pound (GBP) is on the back foot today as fears around the UK economy continue to swirl.
This morning, the British Chambers of Commerce (BCC) warned that the UK’s ‘fragile economy’ is ‘on the edge of a recession’.
🗣️@realVickyPryce: "The BCC forecast shows the UK economy is teetering on the edge of a recession. But the fact is, that with growth predicted to hover so close to zero for three years, it will still feel a lot like one for most people and businesses."
👇https://t.co/Equ88oE3hZ— BCC (@britishchambers) September 6, 2023
The BCC’s latest economic forecast predicts that the UK will likely avoid a technical recession, but flatlining growth and higher interest rates will mean that it will feel like a recession for many people and businesses.
This bleak view of the British economy was compounded by a new publication from the Resolution Foundation, in which the thinktank warns of the worst fall in living standards since the 1950s.
According to the Resolution Foundation, household incomes could be 4% lower in 2024-25 than they were in 2019-20.
This parliamentary term is on track to be by far the worst for living standards since the 1950s. Typical working age household incomes are on course to be 4% lower in 2024-25 than they were in 2019-20.
Never in living memory have families got so much poorer over a parliament. pic.twitter.com/909M5LM0KZ— Resolution Foundation (@resfoundation) September 6, 2023
The two reports today add to growing fears that the UK economy faces a long period of low growth and high interest rates, as the country’s cost-of-living crisis shows no signs of abating.
This is pressuring the Pound today.
US Dollar (USD) Muted despite Risk-Off Mood
Meanwhile, the US Dollar (USD) is struggling to push higher against the Pound today, with the current risk-off market mood failing to lift the safe-haven ‘Greenback’.
USD investors may be refraining from placing aggressive bets ahead of the ISM services PMI this afternoon, which could have a big impact on the American currency. This, in turn, may be limiting the US Dollar’s movements.
GBP/USD Exchange Rate Forecast: US Services PMI to Boost the ‘Greenback’?
Looking forward, the ISM services PMI is in the spotlight for USD investors.
Economists expect the American services sector to have shown resilience in August, with the PMI score forecast to ease slightly from 52.7 to 52.5 but remain in expansion territory. If the data prints as expected, signs of strength in the US economy could boost USD.
However, recent service-sector data from elsewhere in the world – including the UK, the Eurozone and China – have missed forecasts. A gloomy reading could dent Federal Reserve interest rate rise bets, which may weigh on the ‘Greenback’.
As for the Pound, officials from the Bank of England (BoE) face a grilling from parliament’s Treasury Select Committee this afternoon and GBP investors will likely be watching for any hints around monetary policy.
If policymakers reiterate their commitment to bringing down inflation, bets on further rate hikes could support GBP.
Conversely, any indications that UK recession risks may force the BoE to soon stop tightening could see Sterling fall.