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GBP/USD Exchange Rate: Will Overinflation Fears See the Pound Fall Further?

GBP/USD Exchange Rate Tumbles to 11-Week Low

The Pound US Dollar (GBP/USD) exchange rate has been sliding this morning, as yesterday’s UK GDP growth figures showed a slightly larger-than-expected contraction and the UK manufacturing PMI missed market forecasts.

The pair is trading at an 11-week low of $1.37764 at the time of writing, down over a cent from its highs at the beginning of the week.

Pound (GBP) May Struggle amid Overinflation Fears

The Pound (GBP) could face some strong headwinds through the rest of the week, as inflation and furlough fears weigh on the currency in the absence of any upcoming data releases.

One potential factor that could pressure GBP/USD is the ending of the UK government’s furlough scheme, which begins to wind down today. As the scheme is phased out, the costs of keeping on furloughed employees will be transferred to their employers.

The Institute for Fiscal Studies (IFS) has raised concerns that this could lead to a steep drop in income for tens of thousands of workers, as employers react by making redundancies.

Also weighing on the Pound are comments by Andy Haldane, Chief Economist at the Bank of England (BoE), who has warned about rising inflation in the UK. Haldane said he believes ‘that this is the most dangerous moment inflation-targeting has so far faced’, urging his colleagues to consider tightening monetary policy.

In response, BoE Governor Andrew Bailey reiterated the central bank’s dovish view that the current surge in inflation is ‘temporary’, contributing to the Pound’s decline.

With no forthcoming data to support Sterling, these fears could see GBP/USD drop further by the end of the week.

Another factor affecting the Pound could be coronavirus news. With the UK still set to lift the remaining restrictions later this month, any new developments may cause some movement in Sterling.

Could the US Dollar (USD) Continue to Climb on Jobs Data?

The US Dollar (USD) could strengthen further over the next two days, with some positive data releases due.

First up, the US initial jobless claims are projected to show a continued drop in unemployment. Meanwhile, the ISM manufacturing PMI is set to remain above 60, pointing to a rapid recovery in American factory activity. If both these releases meet expectations, they could extend USD’s upside.

Tomorrow’s big release is the non-farm payrolls, which are expected to show that the US economy added 700,000 jobs last month. Again, if the results reach the projected figures then the ‘Greenback’ could strengthen further.

However, the payrolls have missed market forecasts for the last two months. Could the data disappoint again?