April 25, 2022 - Written by John Cameron
STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Drops as Potential Lockdowns in China Spook Markets
GBP/USD Falls as Chinese Lockdown Fears Prompts Bearish Trade
The Pound US Dollar (GBP/USD) exchange rate is dropping as the latest round of lockdowns across China unsettles markets, driving a risk-off mood.
At the time of writing, the GBP/USD exchange rate is trading at approximately $1.2730, roughly down by 0.8% from today’s opening levels.
US Dollar (USD) Rises amid Risk Off Mood
The US Dollar is climbing against the Pound (GBP) this morning as markets fear China could soon see a new round of lockdowns.
In Chaoyang, Beijing’s largest district, authorities have begun mass testing as a result of high levels of coronavirus, with observers fearing the nation’s capital could soon be in lockdown. This comes after restrictions in Shanghai were further tightened last week.
According to Alvin Tan, an analyst as RBC Captial Markets, China is contending with a ‘rapidly deteriorating growth outlook amid zero-Covid restrictions.’
Markets are concerned this may cause China’s economic recovery to stall, while also resulting in more global supply chain bottlenecks.
Unsurprisingly this is driving investors towards the safe-haven US Dollar this morning.
Moreover, a hawkish speech from Federal Reserve Chairman Jerome Powell last week continues to support the ‘Greenback’.
Powell signalled the central bank is likely to take an aggressive approach at the next meeting, stating ‘that 50 basis points will be on the table for the May meeting.’
However, some critics believe the Fed’s aggressive approach has come too late which is limiting USD’s gains.
Yelena Shulyatyeva, senior U.S. economist for Bloomberg Economics, said:
‘They want to believe they can achieve a soft landing. It will be extremely difficult to do. Monetary policy is a very blunt tool.’
Pound (GBP) Stumbles amid UK Political Uncertainty
The Pound (GBP) is losing ground against the US Dollar (USD) as the UK Prime Minister, Boris Johnson, remains under fire.
Johnson has recently been fined for attending gatherings during the 2020 lockdown and is expected to receive additional fines in due course.
In turn, Johnson has been accused of misleading parliament having previously claimed ‘no rules were broken’ throughout the pandemic.
As a result, the Privilege Committee will investigate whether the PM knowingly misled the house. Should Johnson be found guilty of doing so, he will be expected to resign in accordance with the ministerial code.
Although Johnson maintains he has ‘absolutely nothing to hide’, uncertainty in the UK political landscape is weighing on Sterling.
Moreover, Bank of England (BoE) interest rate hike bets have diminished, on the back of some weak data and dovish comments from BoE policymakers.
BoE Governor Andrew Bailey stated:
‘We are walking a very tight line between tackling inflation, and the output effects of the real income shock and the risk that it could create a recession and push us too far down in terms of inflation.’
Furthermore, household incomes are struggling to keep up with surging inflation. In turn, the UK’s cost of living crisis continues to weigh on GBP exchange rates.
GBP/USD Exchange Rate Forecast: CBI Data in Focus
Looking ahead, the Pound US Dollar may be weighed on by a variety of data releases from the Confederation of British Industry.
The CBI business optimism index for the second quarter is expected to fall from -9 to -23. If this prints in line with market forecasts, this could drag on Sterling sentiment.
Moreover, the CBI industrial trend orders for April are predicted to slip from 26 to 21.
On the other hand, the US Dollar may be supported by the durable goods orders for March. The data is expected to report order growth rebounded from -2.2% in February to 1%.
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