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Pound US Dollar Exchange Rate to Slide amid Global Economic Downturn?

US$100 bills.

GBP/USD Exchange Rate Hits Multi-Week High

The Pound US Dollar (GBP/USD) exchange rate climbed to its highest level since the beginning of July after a positive turnaround in global risk sentiment.

At time of writing the GBP/USD exchange rate is around $1.2063, up by 0.47% from this morning’s opening levels.

US Dollar (USD) Subdued as Market Sentiment Improves

The US Dollar (USD) is under pressure today as a positive turnaround in global risk sentiment has seen the ‘Greenback’ slip. The US Dollar Index fell to its lowest levels since early July but could soon see a rebound as safe-haven flows are likely to return.

Worrying news out of Europe is likely to affect the negative correlation the US Dollar shares with the Euro. Contractions recorded amongst several sectors and worsening market mood has pushed Germany to the brink of recession. Business confidence in the manufacturing sector fell to its lowest levels since April 2020, with companies expecting serious downturns in business over the coming months.

Looking ahead to the crucial Federal Open Market Committee (FOMC) monetary policy meeting on Wednesday, investors appear to be holding off their bets until then. Expectations of a bold interest rate hike of 75bps at the next meeting could cool if recessionary fears prove too risky for the economy. The central bank could then slow their pace of rate hikes, potentially deterring investors.

Pound (GBP) Rallies Despite Persistent Political Uncertainty

The Pound (GBP) could be set to fall from its lofty multi-week heights as risk sentiment looks to return. Despite better-than-expected flash PMI data bolstering rate hike bets, an expected downturn in global economic outlook could sap demand.

Ongoing political uncertainty is keeping a lid on any potential gains for Sterling. As the leadership race for Boris Johnson’s replacement reached its final stage with the final two candidates, investors are concerned about how they intend to steer the UK through economic turmoil. A firm pro-Brexit stance shared by both could weigh on the Pound amid ongoing tensions between the UK and the EU over the Northern Ireland protocol.

With very little in the way of major data releases this week, the Pound will be left wide open to market sentiment. inflationary pressures ever soaring, and political volatility showing no signs of slowing, a downturn in global economic sentiment could drag Sterling down once again.

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