Why is the Pound to US Dollar Exchange Rate at an All-Time-Low

September 26, 2022 - Written by John Cameron

STORY LINK Why is the Pound to US Dollar Exchange Rate at an All-Time-Low

The Pound exchange rates hit record lows on Monday as UK Chancellor Kwasi Kwarteng pledged to pursue further tax cuts on Sunday.

At time of writing the Pound traded at around $ 1.0755 against the US Dollar, roughly down 0.9% from Monday’s opening levels.

Pound Exchange Rates Crash as Further Tax Cuts Displease GBP Investors

The Pound (GBP) struck a new record low against the US Dollar (USD) on Monday.

This extended Friday’s losses, which followed the announcement of Chancellor Kwasi Kwarteng’s mini-budget.

Kwarteng outlined plans for massive tax cuts, to be funded by increased borrowing. GBP investors fear a surge in borrowing at a time when borrowing costs are on the rise could see UK public debt swell to unsustainable levels.

Far from stimulating growth, which Kwarteng insists the tax cuts will achieve, investors are concerned this will only serve to deepen the looming recession and increase inflation.

Susannah Streeter, Senior Investment and Markets Analyst, at Hargreaves Lansdown said:

‘The worry is that not only will borrowing balloon to eye watering levels, but that the fires of inflation will be fanned further by this tax giveaway, which offers higher earners the bigger tax break.’

The GBP selloff then intensified at the start of the week after these fears were fanned by comments made by the Chancellor over the weekend in which he suggested he wanted to implement even more tax cuts.

This saw the GBP/USD exchange rate plunge to a record low before clawing back some of its losses during European trade.

The US Dollar (USD) held the high ground on Monday as a clear risk-off mood hung over global investors, bolstering USD favourability.

Investor risk appetite was supressed by several factors on Monday. These included the rapid sell off of GBP, continued conflict within Ukraine and the expectation for more aggressive interest rates hikes from the world’s major central banks.
The latter is stoking fears of a looming global recession pushing investors to shun risk sensitive currencies in favour of the safe-haven ‘Greenback’.

David Brown, Chief Executive of New View Economics, wrote on Monday:

‘[I]nvestors are running for cover from stocks, bonds and peripheral currencies. Recession is beckoning, inflation and interest rates are heading higher and global economic confidence is ebbing away.’

Also, supporting USD on Monday was the expectation that the Federal Reserve will hike interest rates by another 75bps in October, which cheered USD investors. However, this also increased fears of a global recession for US investors.

As such the US Dollar was strengthening ahead of the start of the US trading session on Monday.

Looking ahead, impetus for the Pound US Dollar exchange rate could be provided by the Bank of England (BoE).

Investors speculate the BoE will enact an emergency interest rate hike to shore up the Pound following its recent collapse. However, if true it could have long term impacts for the GBP as increased interest rates contribute to recession fears, which will likely weigh on Sterling.

Whilst GBP investors wait on action from BoE, they will likely continue to trade on domestic headlines. Could further announcements from Truss or Kwarteng stoke further Sterling selloffs?

Meanwhile, USD investors will be focused on several Federal Reserve policymakers’ speeches on Monday afternoon.

Fed policymakers continue to push hawkish rhetoric in response to rising inflation. Investors will be on the lookout for any further hawkish hints or comments that underpin the expected 75bps hike in October. If, however, comments hint at a more restrictive policy in October’s meeting, then USD gains may be capped.

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TAGS: Pound Dollar Forecasts