Pound US Dollar (GBP/USD) Climbs Despite Shrinking UK Economy

November 11, 2022 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Climbs Despite Shrinking UK Economy

Pound US Dollar (GBP/USD) Exchange Rate Climbs Regardless of Faltering UK Economy

The Pound US Dollar (GBP/USD) exchange rate on Friday, despite the latest UK GDP release showing a contraction in economic growth.

As such, the GBP/USD exchange rate rose to around US$1.1730 at the time of writing, an increase of roughly 0.3% from Friday’s opening rates.

Pound (GBP) Muted amid Contracting UK Economy

While the Pound (GBP) rallied against the US Dollar (USD) on Friday, trade was much more subdued against other peers due to Friday morning’s release of GDP data for the third quarter.

Third quarter QoQ growth fell from 0.2% to -0.2%, but did manage to exceed forecasts of -0.5%. Meanwhile, the YoY showed a similar story – it fell from 4.4% to 2.4%, but still came in above the forecasts of 2.1%.

Despite beating expectations, investors were keenly aware of how the GDP readings aligned with news over the past week which pointed to a shrinking economy. Between contracting GDP and a raft of UK businesses pointing to shrinking profits, the economic outlook for the UK continued to darken during Friday’s session.

Martin McTague, the Chairman of the Federation of Small Businesses issued a further warning of the UK’s dour outlook. He stated: ‘Lower levels of reserves and resources mean they are more vulnerable to downturns, and at a time when confidence is deteriorating in both consumers and businesses, the outlook for the UK economy is now very bleak indeed. The fall in GDP is one headline figure made up of countless bits of disappointing news for small businesses across the country.’

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However, investor confidence in Chancellor Jeremy Hunt served to cushion the Pound’s losses somewhat. With Hunt stating that the government intended to make the recession ‘shallower and quicker’ and reaffirming targeted support for struggling households, investors opted to stick by Sterling, allowing it to make small gains.

US Dollar (USD) Sinks as Investors Digest Inflation Data

The US Dollar (USD) weakened across the board on Friday, as investors examined the implications of Thursday’s inflation data in greater detail.

The Consumer Price Index reading for the US fell to 7.7% YoY in October, compared to September’s reading of 8.2%. While a fall of 8% was expected, the larger drop has tempered investor expectations of larger interest rate hikes from the Federal Reserve.

The Fed indicated previously that more work needed to be done, but the expectation turned smaller rate hikes and a more dovish attitude, with a 50bps hike seeming the most likely.

The fall in inflation prompted a more optimistic market sentiment on Friday, as it could be indicative of wider slowdowns. As risk-aversion decreased, the safe-haven ‘Greenback’ proved less attractive to investors during Friday’s session.

Pound US Dollar Exchange Rate Forecast: Autumn Statement to Buoy Sterling?

Looking ahead to next week, the Pound US Dollar exchange rate may favour Sterling as investors anticipate the next budget from Rishi Sunak’s government.

With a return to fiscal orthodoxy expected in the wake of the previous UK government’s disastrous mini-budget, investors will be keeping a close watch on the details of Chancellor Jeremy Hunt’s plan to repair the damage and prevent a deepening recession.

Any news which may reduce economic pain for the UK may boost GBP, and if Wednesday’s inflation figures increase as expected, Sterling may be buoyed further by increasing rate hike bets.

For the US Dollar, the core catalyst of movement is likely to be the midterm election results. With the remaining seats in close contention, USD investors are anticipating confirmation of political gridlock due to the Republicans being poised to take control of the House of Representatives. Should the stalemate occur, USD may seem short term gains.

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