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Pound US Dollar Exchange Rate News: GBP/USD Rallied amid Modest Recovery in Global Market Sentiment

August 3, 2022 - Written by John Cameron

Pound (GBP) Firmed Despite Drop in Service Sector Growth

The Pound (GBP) saw mixed success against its rivals as a downward revised 52.6 from an expected 53.3 edged the services sector ever closer to stagnation. The softest expansion in the sector in 17 months was due to soaring inflationary pressures having a direct impact on consumer spending. Operating costs and average prices surged, as the cost-of-living squeeze compounded added to plummeting confidence in the sector.

Tim Moore, Economics Director for S&P Global said that July was the worst month for business activity since February 2021, adding:

‘Reduced levels of discretionary consumer spending and efforts by businesses to contain expenses due to escalating inflation have combined to squeeze demand across the service economy.

The near-term outlook also looks subdued, as new order growth held close to June’s 16-month low and business optimism was the second weakest since May 2020.’

Propping up the Pound is the expectations of a 50bps interest rate hike at the next Bank of England (BoE) policy meeting. If the central bank meets forecasts, it will be the largest rise since 1995, anything short however, could see Sterling slide.

Elsewhere, Rishi Sunak and Liz Truss continue to draw criticisms over their no-holds barred approach to winning the Conservative leadership. Investors remain cautious towards the would-be Prime Minister due to potentially damaging fiscal policies and a growing divide within the Tory party. In the latest controversy, both Truss and Sunak have drawn criticisms over their so-called war on ‘woke’ issues as they attempt to pander to the core Tories, the ‘far right’.

With both candidates willing to fuel a culture war and propose potentially damaging tax cuts, the chase for the populist vote could come at an expense of both the economy and the wider voting population. The perpetual political turmoil threatens to hamper the Pound as investors are increasingly wary about the economic future of the UK.

US Dollar (USD) Under Pressure amid Risk-On Impulse

The US Dollar (USD) lost support as a positive mood in the equity markets halted safe-haven flows, for now at least. An improvement in global market sentiment has kept the US Dollar subdued, despite US House of Representatives Nancy Pelosi’s visit to Taiwan irking China.

Mounting geopolitical tensions between the US and China are concerning the market as Pelosi becomes the first senior US representative to visit Taiwan since Newt Ginrich in 1997. Defying China’s warnings of such a visit, citing that it would ‘seriously violate the sovereignty and territorial integrity’ of China. Pelosi told Taiwan President Tsai Ing-wen:

‘Our delegation came to Taiwan to make unequivocally clear that we will not abandon Taiwan.

‘Now, more than ever, America’s solidarity with Taiwan is crucial, and that’s the message we are bringing here, today.’

In retaliation for Pelosi’s visit, China has since announced a show of military strength, with air and sea drills within Taiwan’s territory. Beijing have also confirmed suspensions of imports of citrus fruits, mackerel and even the banning of natural sand exports to Taiwan.

Lending some moderate support to the US Dollar is the relatively hawkish tone from several Federal Reserve officials on Tuesday and hinted at further interest rate hikes in the coming months. St Louis Fed President James Bullard remains confident in avoiding a recession, and points to further bold rate hikes:

‘I think that inflation has come in hotter than what I would have expected during the second quarter. Now that that has happened, I think we’re going to have to go a little bit higher than what I said before.’

GBP/USD Exchange Rate Forecast: Hawkish Fed to Offset Poor PMI Data?

Looking ahead, the Pound US Dollar exchange rate could see further fluctuations with the printing of several PMI data releases for the US. An expected slowdown in the services sector is likely to weigh on the ‘Greenback’.

A hawkish speech from Philadelphia Fed President Patrick T. Harker could provide a much-needed boost for the US Dollar.

Meanwhile, the Pound will be left open to market sentiment as a lack of data means ongoing political uncertainty and social unrest could see Sterling slide.

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