The Pound US Dollar (GBP/USD) exchange rate fluctuated wildly as a troubled UK economy as the International Monetary Fund (IMF) cuts global growth forecast.
At time of writing the GBP/USD exchange rate traded around $1.1064, relatively unchanged from the morning’s opening levels.
Pound (GBP) Exchange Rates Subdued amid Political and Economic Uncertainty
The Pound (GBP) struggled for demand on Tuesday as a volatile market kept investors spooked.
The Bank of England (BoE) announced a second intervention amid calls from pension funds to extend support further. The mini-budget market meltdown, which saw Sterling plummet to historic lows amid the backdrop of unfunded fiscal plans. The central bank opted to extend its bond-buying schemes as they attempt to calm the volatile markets.
Further weighing on the Pound was in addition to downgrading their global economic forecast from 3.2% to 2.7%. The IMF also took aim at Chancellor Kwasi Kwarteng and his fiscal plans. The Washington-based IMF called Kwarteng’s tax cuts and energy support package made the BoE’s fight against inflation far more difficult. It said:
‘In the United Kingdom, the announcement in September of large debt-financed fiscal loosening, including tax cuts and measures to deal with the high energy prices, was associated with a rise in gilt yields and a sharp currency depreciation that was later reversed.’
With Kwarteng to face MPs in parliament on Tuesday afternoon, he could come under fresh fire as he takes questions on his mini-budget. The Institute of Fiscal Studies (IFS) has said that the UK will need £60bn to fund the growth plan, and with fears of further public spending to fund the mini-budget, the Pound could come under increased pressure.
Elsewhere, mixed labour market data failed to lift the Pound. Despite unemployment sinking to a fresh low of 3.5%, levels not seen since 1974, the concern is aimed at the drastic increase in employment inactivity. 252K people left the jobs market, pointing to the biggest rise since records began in 1971. David Freeman, head of labour market and household statistics for ONS, said:
‘‘The unemployment rate continues to fall and is now at its lowest for almost 50 years. However, the number of people neither working nor looking for work continues to rise, with those who say this is because they’re long-term sick reaching a record level.’
US Dollar (USD) Exchange Rates Rallied on Risk-Averse Markets
The US Dollar (USD) meanwhile, continued its relentless strength against its rivals as the US Dollar Index traded at its highest levels in ten days on the back of global recession fears and escalating geopolitical tensions.
Despite the IMF warning of a global economic slowdown, edging ever closer to a recession, safe-haven flows continued to offset their concerns. But IMF Chief Economist Pierre-Olivier Gourinchas has warned that the US is losing momentum, he added:
‘The three largest economies, the United States, China and the euro area will continue to stall. In short, the worst is yet to come, and for many people, 2023 will feel like a recession.’
Meanwhile, propping up the ‘Greenback’ is elevated expectations of further interest rate hikes. After the relatively strong labour market data from last week, Federal Reserve speakers continued their hawkish rhetoric and investors remain confident in the central bank’s inflation-busting approach to monetary policy.
GBP/USD Exchange Rate Forecast: Stagnating UK Economy to Sink the Pound?
Looking ahead, the Pound US Dollar exchange rate could see further movement with the release of UK GDP growth data. An expected stagnation in the UK economy could weigh further on the Pound.
Meanwhile, the US Dollar will see a flurry of data releases to sway investors. FOMC minutes will also be released. Any further hints at the Fed’s monetary policy could see the ‘Greenback’ surge further.