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Pound US Dollar Exchange Rate Drops as UK’s ‘Summer of Discontent’ Continues

July 28, 2022 - Written by John Cameron

Pound US Dollar (GBP/USD) Exchange Rate Tumbles amid Risk-Off Mood

The Pound US Dollar (GBP/USD) exchange rate is falling today amid a risk-off market mood. The promise of further industrial action in the UK may also be weighing on the currency pair.

On the other hand, major losses for GBP/USD could be limited by a downturn to US GDP growth. The figures have pushed the country’s economy into a ‘technical recession’.

At time of writing the GBP/USD exchange rate is at around $1.2130, which is down roughly -0.3% from this morning’s opening figures.

Pound (GBP) Falls as Felixstowe Workers Announce Strike Action

The Pound (GBP) is slipping against many of its rivals today. News that dockers at Felixstowe, the UK’s largest container port, have voted to strike in August may be weighing on the currency.

Workers at Felixstowe voted overwhelmingly to support strike action after having rejected a 5% pay rise. Unite, the union representing the staff, stated that such an increase would represent a real-terms pay cut in the face of 11.8% price inflation.

The economic impact on the UK of the strike could be severe. Felixstowe handles around 2,000 ships a year and roughly 50% of the UK’s container traffic. Analysts have stated that the damaging effects of the strike could be similar to the backlogs witnessed over the 2021 Christmas period.

Sterling could be underpinned today by increased bets on action from the Bank of England (BoE). After the Fed’s rate hike on Wednesday, investors are looking to the UK’s central bank for action to combat soaring inflation.

Speaking last week, BoE Governor Andrew Bailey signalled that a 0.5% interest rate hike was ‘on the table’ for the central bank’s next meeting. A hike that large would push rates to their highest point since 1995.

US Dollar (USD) Gains Despite Fall into Technical Recession

The US Dollar (USD) is recovering from some losses earlier today. A risk-off market mood and uptick to US Treasury bond yields is helping to bolster the safe-haven ‘Greenback’ after GDP figures indicated a surprise fall to second quarter growth.

Figures released today indicated that the US economy contracted by -0.9% 2022’s second quarter versus a forecast recovery of 0.5%. The drop represents the second consecutive quarter of negative growth and pushes the US into a technical recession.

Whilst a recession must be officially declared by the US National Bureau of Economic Research (NBER), many economists are arguing that a full recession could be on the horizon.

Jim Reid of Deutsche Bank said:

‘We still think a recession is almost a slam dunk over the next 12 months but want to see more evidence of employment rolling over before we would call the current US environment a recession.’

The Federal Reserve’s interest rate decision on Wednesday could also be weighing on USD today. The Fed rose rates by 0.75%, a move that was largely priced in by the markets. Dovish comments from Fed Chair Jerome Powell are likely weighing on the currency, however.

Finally, the US Dollar could also be seeing its gains capped after a fall to jobless figures this week. Investors could see the data as signs of a cooling labour market, reducing bets on future action from the Fed.

GBP/USD Exchange Rate Forecast: Will Further Industrial Action Cap Gains for Sterling?

The Pound will see no further significant data this week. The currency could be affected by the prospect of further industrial action across the UK. Political uncertainty surrounding the candidates to replace Boris Johnson as PM may also weigh on Sterling.

For the US Dollar, a forecast rise to the PCE price index on Friday could help shore up the currency. The predicted uptick to the Fed’s preferred measure of inflation could increase bets of further aggressive action from then central bank.

Reaction to the Fed’s interest rate decision and forward guidance could prompt additional movement in USD this week.

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