Pound US Dollar Exchange Rate News: GBP/USD Plummets amid UK Credit Rating Fears

October 6, 2022 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Plummets amid UK Credit Rating Fears

GBP/USD Exchange Rate Plummets amid UK Credit Rating Concerns

The Pound to US Dollar (GBP/USD) exchange rate was fell off a cliff on Thursday as the UK was threatened with a credit rating downgrade.

At time of writing the GBP/USD exchange rate traded at around $1.1245, roughly down 1% from Thursday’s opening levels.

Pound (GBP) Under Pressure as the UK is at Risk of Credit Downgrade

The Pound (GBP) fell against the majority of its peers on Thursday as the credit agency Fitch downgraded their UK credit outlook.

Fitch is the second agency to do so, following S&P in lowering its outlook for the UK’s AA- investment grade credit rating, from stable to negative.

This comes in the wake of weeks of Pound volatility following the release of the UK government’s controversial mini budget. The budget, which was released without a forecast, while also undermining the aggressive monetary tightening being pursued by the Bank of England (BoE).

In a statement given by the Fitch on Thursday, the credit agency said:

‘The large fiscal stimulus, announced without compensatory measures or an independent evaluation of the macroeconomic and public finances’ impact, and the inconsistency between fiscal and monetary policy stance given strong inflationary pressures, have in Fitch’s view, negatively impacted financial markets’ confidence and the credibility of the policy framework, a key long-standing rating strength.’

This coupled with considerable Conservative party infighting over the last week has cast doubts over Liz Truss’s ability to successfully navigate the current financial crisis. As such, Sterling was severely dented on Thursday.

US Dollar (USD) Firms amid Investor Risk Aversion

Meanwhile the US Dollar (USD) was up against most of its peers on Thursday as risk aversion gripped investors, who flocked to the safe haven currency.

This bolstering of USD is mostly in response to the bleak global economic outlook. As the war in Ukraine continued to escalate and recession fears pressured currencies, investors sort stability.

On Thursday USD investors seemed particularly focused on hawkish comments made by the Federal Reserve.

Fed policymaker Raphael Bostic said on Wednesday that there was:

"[C]onsiderable speculation already that the Fed could begin lowering rates in 2023 if economic activity slows and the rate of inflation starts to fall ... I would say: not so fast.’
As such, the US Dollar was lifted by investors expectations of another aggressive interest hike in the Fed’s next policy meeting.

However, USD may have seen its upside limited by investors who were concerned of the long-term effects of aggressive monetary tightening could have on the US economy.

GBP/USD Exchange Rate Forecast: Robust US Payroll Figures to Boost USD Demand?

Looking ahead to the end of the week, the Pound US dollar exchange rate could face pressure with the publication of the latest US non farm payroll figures.

Friday’s data is expected to report the US economy continued to add a health number of jobs in September. Additional signs of a tightening US labour market is likely to bolster the Fed’s resolve to hike interest rates and could see the US Dollar soar on Friday.

A lack of UK data will likely see GBP investors focus on domestic headlines. On Thursday Chancellor Kwasi Kwarteng will hold a meeting will UK banks to discuss rocketing mortgage prices. Could a positive outcome shore up the Pound? Or will a lack of results to stabilise the mortgage market rattle GBP investors further?

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