Pound US Dollar (GBP/USD) Exchange Rate Dips Ahead of Chicago Fed Data

August 22, 2022 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Dips Ahead of Chicago Fed Data

GBP/USD Exchange Rate Ticks Down on UK Headwinds

The Pound US Dollar (GBP/USD) exchange rate is weakening this morning as a risk-off mood draws safe-haven support to the US Dollar (USD) while the Pound (GBP) succumbs to external headwinds amid a lack of domestic data.

At the time of writing, GBP/USD is trading at $1.1804, down 0.2% from today’s opening levels.

Pound (GBP) Pressured by Economic Forecasts, Strike Action

The Pound is dropping in several exchange rates this morning, subdued by downbeat economic forecasts as well as ongoing strike action and a growing disparity in wages between the UK’s poorest and most wealthy.

Citibank has predicted that UK inflation will hit 18% early next year as energy bills surge, reaching the highest level in almost half a century. While this is likely to inspire aggressive policy tightening measures from the Bank of England (BoE), it threatens to bring to its knees an economy already in recession.

Exceeding recent forecasts from consultancy firm Cornwall Insight, Citi estimates that the energy price cap will jump to £4,567 in January and then £5,816 in April.

Benjamin Nabarro, chief UK economist at Citi, commented:

‘Our latest estimate, updated for the further 25% and 7% rally in UK gas and electricity prices last week, points to a further upside shift in UK inflation… we now expect CPI inflation to peak at over 18% in January. RPI inflation, we think, will peak at over 20%.’

Also weighing upon economic growth are ongoing strikes across the UK. Rail strikes were in the headlines last week as over 45,000 UK rail workers walked out in a dispute over pay, conditions and job cuts – this week, criminal barristers in England and Wales have voted to strike in September.

Meanwhile, approximately 1,900 dock workers at the UK’s largest container port are holding an eight-day strike over a pay row. Shipping companies and union leaders are warning the action could disrupt supply chains and cause shortages of certain products.

Elsewhere, cost-of-living concerns remain high as the Resolution Foundation warns that poor households, and those in badly insulated homes, will suffer the most amid rising energy prices. Rubbing salt in the wound is news that while many households are struggling, FTSE 100 chiefs are enjoying a 39% pay rise (on average).

US Dollar (USD) Enjoys Risk-Off Tailwinds

The US Dollar is trading broadly higher as widespread risk aversion attracts safe-haven support to the currency. Hawkish expectations for the Federal Reserve bank also buoy the ‘Greenback’ along with fears of a global recession.

The US Dollar index – a measure of the currency’s performance against a basket of other currencies – rose 2.3% last week: it’s largest one-week gain. USD was supported by the release of the Federal Open Market Committee (FOMC)’s latest minutes, alongside hawkish comments from policymakers Mary Daly and James Bullard.

Expectations for the Fed remain upbeat, with several investors predicting a 75bps interest rate hike in September. Nevertheless, a half-point rise seems more likely and is the expected outcome according to a panel of economists surveyed by Reuters.

Investors are likely to look ahead to Fed Chairman Jerome Powell’s speech at the Jackson Hole Symposium on Friday, for clues on the state of the US economy. Powell’s speech should divulge the central bank’s policy outlook, as well as flagging additional policy matters that may influence the US Dollar in the near-to-mid term.

In the meantime, the Chicago Fed’s national activity index is expected to reveal a fall in July’s economic growth according to production, employment and sales indicators among others. The drop is forecast to be smaller than in June, however, possibly capping headwinds.

GBP/USD Exchange Rate Forecast: Risk Appetite to Drive Movement?

Looking ahead, if risk appetite improves through today’s session, the Pound US Dollar exchange rate could firm, with USD relinquishing safe-haven gains.

Sterling tailwinds are likely to be capped, however, as political tensions compound cost-of-living pressures. Economists maintain that prime ministerial candidate Liz Truss’s preference for tax cuts over welfare payments is likely to curb the government’s ability to help UK households though growing inflationary pressures.

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TAGS: Pound Dollar Forecasts