US Recession Fears Sends Pound Sterling US Dollar (GBP/USD) Exchange Rate Higher
UPDATE: The Pound Sterling US Dollar (GBP/USD) rose by around 1.1% this afternoon. This left the pairing trading at around $1.1716.
This afternoon, data revealed that economic output in the USA declined at the fastest rate in over a decade due to the coronavirus pandemic.
Markit’s PMI composite plummeted deeper into contraction, at 40.5, while the country’s flash services PMI slumped to 39.1.
Commenting on the data release, Markit’s Chief Business Economist, Chris Williamson noted:
‘US companies reported the steepest downturn since 2009 in March as measures to limit the COVID-19 outbreak hit businesses across the country. The service sector has been especially badly affected, with consumer-facing industries such as restaurants, bars and hotels bearing the brunt of the social distancing measures, while travel and tourism has been decimated. However, manufacturing is also reporting a slump in demand, with production falling at a rate not seen since 2009, linked to either weak client demand, lost exports or supply shortages.
‘The survey underscores how the US is likely already in a recession that will inevitably deepen further. The March PMI is roughly indicative of GDP falling at an annualised rate approaching 5%, but the increasing number of virus-fighting lockdowns and closures mean the second quarter will likely see a far steeper rate of decline.’
Pound Sterling US Dollar (GBP/USD) Exchange Rate Rises as Fed Boosts Risk Appetite
The Pound Sterling US Dollar (GBP/USD) exchange rate rose by over 1.2% this morning as investors moved away from the ‘Greenback’. This left the pairing trading at around $1.1739.
The US Dollar suffered losses this morning as risk appetite was offered support after Monday’s Federal Reserve announcement.
The Fed announced it would be offering markets as much liquidity as possible and announced several programmes including guarantees for direct loans to companies, purchases of corporate bonds, and a plan to give small and medium sized businesses credit.
Commenting on this, Koichi Kobayashi, chief manager of forex at Mitsubishi Trust Bank noted:
‘We seem to have got out of a phase where everything from stocks to safe assets such as bonds and gold were sold.
‘The Dollar funding conditions are easing slightly, compared with a week ago, though I wouldn’t say things are normal. While the Fed is pumping dollars, we still need to wait and see if those money will flows to every corner of the economy.’
The Fed’s move sent the Dollar index down by around 1% this morning, as demand for the ‘Greenback’ eased.
Meanwhile, last night British Prime Minister Boris Johnson revealed strict new measures to help slow the spread of the coronavirus pandemic.
These measures included the immediate closure of shops selling non-essential goods and a ban on gatherings of more than two people.
The Prime Minister also stated that people should only leave the house where ‘absolutely necessary’ and called the pandemic the ‘biggest threat this country has faced for decades’.
Sterling (GBP) Rises despite Recession Warnings
The Pound was able to extend its gains against the US Dollar despite data revealing the UK PMI composite had fallen to an all-time low of 37.1.
March’s flash data showed a record slump in business activity which sent also showed the service sector contracted at the worst rate since records began.
The data signalled the impact coronavirus has had on the country’s economy so far. The surveys have dealt the economy with a more severe blow than any other time on record.
Commenting on this morning’s data, Markit’s Chief Business Economist, Chris Williamson noted:
‘The surveys highlight how the COVID-19 outbreak has already dealt the UK economy an initial blow even greater than that seen at the height of the global financial crisis. With additional measures to contain the spread of the virus set to further paralyse large parts of the economy in coming months, such as business closures and potential lockdowns, a recession of a scale we have not seen in modern history is looking increasingly likely.’
Pound US Dollar Outlook: Coronavirus Pandemic Remains in Focus
Looking ahead, the US Dollar (USD) could extend its gains against the Pound (GBP) following the release of flash PMI data.
If the US service sector plummets deeper into contraction, with the manufacturing sector not far behind, the ‘Greenback’ will suffer losses.
Meanwhile, a string of weak economic data on Wednesday could leave Sterling under pressure.
If retail prices and inflation both disappoint, it could cause GBP to suffer some losses.
However, if there are further measures in place from Federal Reserve and risk appetite edges higher, this could offset weak UK data and leave the Pound US Dollar (GBP/USD) trading higher.