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Pound US Dollar Exchange Rate to Slip Further on Heightened Recession Fears?

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GBP/USD Exchange Rate Sours amid Downbeat UK PMI Data

The Pound US Dollar (GBP/USD) exchange rate is weakening substantially today as PMI data for the UK highlighted the economic turmoil the UK finds itself in.

At time of writing the GBP/USD exchange rate is around $1.2314, a 0.47% fall from this morning.

Pound (GBP) Dips as Business Activity Suffers Sharpest Drop in Two Years

The Pound is struggling for demand this morning as underwhelming PMI data failed to lift investors’ spirits. The manufacturing sector, despite coming in above expectations, remains firmly in contraction territory.

The service sector plummeted to a two-year low and missed market expectations by a wide margin. Higher interest rates and low consumer confidence were the biggest drivers in declining activity. Slipping back from a 49.9 in December, services fell back down to 48. However, expectations for 2023 improved considerably. Chris Williamson, Chief Business Economist at S&P Global, commented:

‘Weaker than expected PMI numbers in January underscore the risk of the UK slipping into recession. Industrial disputes, staff shortages, export losses, the rising cost of living and higher interest rates all meant the rate of economic decline gathered pace again at the start of the year. Jobs also continued to be lost as firms tightened their belts in the face of these headwinds, though many other firms reported being.’

Looking ahead, and GBP investors won’t have much to look froward to. A relatively quiet trading calendar will likely leave the Pound open to domestic woes. Ongoing industrial action, compounded with the cost-of-living crisis could see Sterling dip further on relentless economic woes.

US Dollar (USD) Climbs Despite Tempered Rate Hike Bets

Meanwhile, the US Dollar (USD) is experiencing choppy trade condition today, unable to find a clear direction against many of its peers. Reduced rate hike expectations from the Federal Reserve could be limiting any gains for the ‘Greenback’ in light of economic data.

With many believing US inflation having finally peaked, the market is hoping for a slowdown in the Fed’s monetary policy. Victoria Scholar, Head of Investment at Interactive Investor, is hopeful of an end to the aggressive rate cycle:

‘Expectations are for two (25bps) increases in the first quarter of 2023 before a pause on interest rates for the rest of the year, in stark contrast to last year’s inflation combative stream of jumbo Fed rate hikes.’

Looking ahead, the US Dollar could see further movement with the release of US PMI data later this afternoon. With both manufacturing and services expected to remain in contraction territory, the ’Greenback’ could slip if either PMI falls below forecasts.

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