Pound US Dollar (GBP/USD) Exchange Rate Drops as Forecasts for UK Economy Darken

Modified: Monday, 5 December 2022 16:35 BST - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Drops as Forecasts for UK Economy Darken

Pound US Dollar (GBP/USD) Exchange Rate Tumbles as UK PMIs Disappoint

The Pound US Dollar (GBP/USD) exchange rate fell on Monday despite a return of global risk appetite. Poor data releases for the UK’s services sector weighed on the currency pair. Above-forecast PMIs for the US also contributed to GBP/USD’s losses.

At time of writing the GBP/USD exchange rate was at around $1.2217, which was down roughly 0.5% from that morning’s opening figures.

Pound (GBP) Drops as Service Sector Data Points to Poor Outlook

The Pound (GBP) slipped lower on Monday. Poor data releases for the UK’s private sectors added to the country’s poor outlook which weighed on Sterling.

The final reading of November’s PMI for the services sector pushed the currency lower. The data release confirmed a contraction in the sector as the UK’s cost-of-living crisis dented household spending.

Speaking on the data, S&P Global economist Chris Williamson said:

‘This is the toughest spell the UK economy has faced since the global financial crisis excluding only the height of the pandemic.’

The losses motivated by the PMI were tempered by a rise in business confidence, however. An easing of price pressures and some stability in the UK government helped bolster optimism.

The latest forecasts from Confederation of Business Industry (CBI) also kept pressure on the Pound on Monday. The predictions released by the CBI on Monday set out a 0.4% contraction in the UK’s economy in 2023.

The recent forecasts represent a drastic shift from the CBI’s June predictions of 1% growth in 2023. Soaring energy prices, a tight labour market, and weak investment were cited as leading factors.

The UK government’s approach to immigration was also highlighted as a leading reason behind the downbeat forecasts.

Speaking on the UK’s immigration policy, CBI Director-General Tony Danker said:

‘We will see a lost decade of growth if action isn't taken. GDP is a simple multiplier of two factors: people and their productivity. But we don't have people we need, nor the productivity.’

US Dollar (USD) Rises after Above-Forecast Private Sector Data

The US Dollar (USD) climbed on Monday despite a risk-on market mood. The ‘Greenback’ benefitted from an uptick in US Treasury bond yields as well as better-than-forecast data releases.

Above-forecast factory orders for October lent support to USD on Monday. The rise was fuelled by a strong demand for machinery and other good which helped stem fears of a downturn in the sector.

A better-than-expected reading of November’s ISM service sector PMI also boosted USD. The index printed at 56.5 versus a forecast slowdown to 53.3. Business cited an easing of supply chain pressures and holiday shopping for the sector’s good fortunes.

Market bets on further interest rate hikes from the Federal Reserve also pushed the US Dollar higher. After strong jobs data last week, investors are forecast further rate hikes from the Fed. Several policymakers have spoken in recent weeks of the need for further hikes to combat soaring inflation.

GBP/USD Exchange Rate Forecast: Will Stagnating PPI Weigh on USD?

Looking to the week ahead for the US Dollar, a forecast widening of the US’ trade deficit could weigh on the currency if Tuesday’s figures print as forecast.

On Thursday, an expected rise in the latest initial jobless claims could bolster USD if investors see it as a sign of a tight labour market.

Friday’s PPI figures are expected to remain close to October’s reading of 0.2%. If the index stagnates as forecast then the US Dollar could slip amid reduced Fed rate hike bets.

Also on Friday, a forecast uptick in December’s consumer confidence figures could help temper any losses for USD.

For the Pound, Wednesday’s house price data could dent confidence in GBP. The data could add to downbeat assessments for the UK’s housing market and prompt lower confidence in the country’s economy.

Upcoming industrial action across the UK could also weigh on the Pound next week.

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TAGS: Pound Dollar Forecasts