August 12, 2022 – Written by John Cameron
Pound (GBP) Plummeted on Recession Expectations
The Pound (GBP) fell against its rivals as GDP growth data for June compounded recession fears. Despite printing marginally better than an expected 1.3% contraction, the UK economy still declined 0.6% MoM. Quarterly, the UK economy also contracted, the first decline in a year as it fell by 0.1%, driven by the health sector. The biggest contributors to the slide came as Covid testing and the vaccine rollout slowed down, and a drop in household spending.
However, modest positivity was seen in the data as UK GDP is still 0.9% above pre-pandemic levels. Also, consumer-facing services saw an increase as Covid restrictions eased in the tourism sector, boosting travel agencies, accommodation, and tour operators. With the Bank of England (BoE) outlining its bleak economic outlook, with expectations of a recession by the end of the year, investors are concerned.
James Smith, Research Director for the Resolution Foundation, warned of the looming recession, he said:
‘While the contraction in June partly reflects the timing of platinum jubilee bank holidays, the economy has started a difficult period on a weak footing.
‘And with the Bank of England forecasting that inflation will rise to over 13% in October, and that the economy will slip into recession in Q4, the outlook is bleak.’
Meanwhile, current Prime Minister Boris Johnson has admitted that the current government’s cost of living support is insufficient but still deflects responsibility to his successor. Asked if the current packages are enough, he replied:
‘No, because what I’m saying what we’re doing in addition is trying to make sure that by October, by January, there is further support and what the Government will be doing, whoever is the prime minister, is making sure there is extra cash to help people.
‘I think it is crucial to understand that, first of all, we realised for a long time that things were going to be tough and that’s why we put in place a lot of measures already.’
US Dollar (USD) Strengthens Moderately on Cautious Market Mood
The US Dollar (USD) found renewed strength despite the softer-than-expected inflation tempering rate hike bets. With the market turning cautious as the UK edges towards a recession amid poor GDP growth, the ‘Greenback’ found support.
Further propping up the US Dollar is the recent hawkish comments from San Francisco Fed President Mary Daly as spoke about another bumper 75bps rate hike in September. With inflation softening, deterring investors, Daly provides the upside to that information:
‘There’s good news on the month-to-month data that consumers and business are getting some relief, but inflation remains far too high and not near our price stability goal.
‘I still think 50 basis points is the case, but I am open to 75 should the data evolve differently.’
The slowing of inflation did temper expectations of further interest rate hikes, but several policymakers ensured the market that they will continue to tighten monetary policy until inflation has been reined in.
GBP/USD Exchange Rate Forecast: Hawkish Fed & Dovish BoE to Sink the Pound Further?
Looking ahead, USD investors will be paying attention to the University of Michigan’s consumer sentiment survey. Inflation expectations within the survey could cause a shift in ‘Greenback’ demand, potentially buoying the US Dollar further.
Elsewhere, a lack of data for the Pound will close the week’s session leaving Sterling exposed to downbeat market sentiment. Persistent political uncertainty could weigh on the Pound.
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