Pound US Dollar Exchange Rate Rallies Despite BoE Announcing UK Recession

November 4, 2022 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate Rallies Despite BoE Announcing UK Recession

Pound US Dollar (GBP/USD) Exchange Rate Attempts Recovery Despite UK Recession

The Pound US Dollar (GBP/USD) exchange rate staged a recovery on Friday, despite confirmation of the UK entering a recession.

This saw the GBP/USD exchange rate climb to around US$1.1216 at the time of writing, an increase of roughly 0.4% from Friday’s opening rates.

Pound (GBP) Mixed as UK Recession Confirmed

The Pound (GBP) experienced mixed trade on Friday, as the markets began to process the confirmation that the UK economy had entered a recession.

Due to a lack of key macroeconomic data for the UK, investors remained wary following Thursday’s announcement from the Bank of England (BoE).

The BoE undercut their expected 75bps interest rate hike with the news that the UK entered a recession that the bank expects to last for two years.

Investors opted to remain cautious, resulting in a session that saw the Pound make equal gains and losses against peers.

While the BoE did note that further rate hikes may be required due to inflation being far beyond their target of 2%, concerns of slowing growth may impact what the bank can do without damaging the economy further.

The BoE’s chief economist Huw Pill explained this in an interview with CNBC. He stated: ‘What we are seeking to do, we’re always seeking to do, is to find that balance that gets us back to our 2% inflation target without generating unnecessary and costly problems in the real side of the economy. Creating that balance, signalling that balance, that was really our key message yesterday.’

Elsewhere, the sharp sell-off from Thursday is allowing GBP to make some gains, as investors aim to capitalise on Sterling’s weakened state, prompting some gains against certain peers.

US Dollar (USD) Fades ahead of Key Data Releases

The US Dollar (USD) struggled for support on Friday as investors anticipated key US labour market data.

While the ‘Greenback’ had been on a roll for most of the week, with non farm payroll data and the unemployment rate for October expected, investors pulled away from USD to examine other options as a risk-on market sentiment developed.

With rumours continuing to mount over a relaxation of China’s zero-covid policy, stock markets began to rally in response.

Sophie Lund-Yates, the lead equity analyst at Hargreaves Lansdown explained this further. She stated: ‘Any indication that some rules could be relaxed would be an immediate dose of grease in the jarring cogs of China’s economy.’

Cushioning the ‘Greenback’s losses is the Federal Reserve. As they continued to strike a hawkish tone on the back of their 75bps interest rate hike, the Fed pointed to a resilient US economy. The economic resilience will allow the Fed to pursue their aggressive tightening policy, without fears of damaging the economy further.

Pound US Dollar Exchange Rate Forecast: Domestic News in Focus

Looking ahead for GBP/USD, a lack of data is available early next week. As such, the core catalyst of movement for the currencies is likely to be domestic news from either country.

For the UK, any further information about the recession could weaken the Pound, with further dovish talk from the BoE likely to add to these woes.

For the US Dollar, risk sentiment is likely to be the key driver. Should the markets move to risk-aversion, the safe-haven ‘Greenback’ may see tailwinds. However, if the markets continue to stay in a risk-on mood, USD may weaken further.

Elsewhere, global economic news could dent the ‘Greenback’ should rumours around China’s zero-covid policy prove true.

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