Pound US Dollar (GBP/USD) Exchange Rate Crashes on Upbeat US Data, UK Economic Woes

September 1, 2022 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Crashes on Upbeat US Data, UK Economic Woes

GBP/USD Exchange Rate Plummets on Worsening Economic Situation

The Pound US Dollar (GBP/USD) exchange rate had slumped through today’s session as risk-off sentiment exerts headwinds alongside UK-specific factors such as downbeat inflation forecasts and political uncertainty.

At the time of writing, GBP/USD is trading at $1.1543, down 0.5% from today’s opening levels.

Pound (GBP) Drops on Bleak Forecasts, Risk-Off Trading

The Pound (GBP) has come under consistent pressure today, as the European trading session opened with reports that the UK’s living standards crisis would persist into 2023. Researchers at the Resolution Foundation clarified that real wages would likely decrease by 5% through the remainder of 2022 and 6% into next year.

The Foundation continued to predict that by mid-2023, all real pay growth since 2003 would effectively be wiped out as households will be £3000 worse-off on average. This would mark the worst cost-of-living squeeze in a century.

Forecasts have been getting progressively worse regarding the UK’s economic situation, as experts call for immediate action. Preventing the implementation of any support mechanism, however, is the fact the UK lacks an appointed leader. Until the election of the new Prime Minister on 5 September, the government cannot commit to any new measures.

Such measures proposed include a ‘deficit tariff scheme’, initially suggested by Scottish Power and subsequently reworked by Ovo Energy. The latter proposes a ‘progressive’ scheme for energy bills which would provide greater support to poor households, discounting a certain amount of energy and charging a higher price past that threshold.

Adding to Sterling headwinds, the UK’s finalised manufacturing PMI today confirmed that the manufacturing sector contracted in August. UK factory output slumped at its fastest pace since May 2020, despite printing above forecasts at 47.3 rather than 46.

Analysts consider a ‘manufacturing recession’ to have begun, blaming economic uncertainty, inflation and component shortages for clients’ cancelling orders in greater numbers. James Brougham, senior economist at the manufacturers’ lobby group Make UK, said:

‘Industry is finding maintaining output levels a significant challenge, especially when average input prices are a whopping 22.6% higher now than they were at the same time last year.’

US Dollar (USD) Climbs on Jobless, Manufacturing Data

The US Dollar (USD) was already supported this morning by weak risk appetite, before the release of last week’s jobless data and the ISM manufacturing PMI boosted the ‘Greenback’ further still against its peers.

Also fuelling the upside were hopes for a 75bps interest rate hike from the Federal Reserve Bank. Policymakers have struck a hawkish tone in recent days, with Cleveland’s Federal Reserve President Loretta Mester reiterating the Fed’s commitment to bringing down inflation yesterday.

The publication of initial jobless claims figures for the week ending 27 August subsequently extended USD gains, as fewer individuals than anticipated registered for benefits for the first time. The release also stipulated that the 4-week moving average was 241,500: a 4,000 drop from the previous week's unrevised average.

The main focus for investors, however, was August’s ISM manufacturing PMI, which carries more weight with markets than the S&P equivalent. The data printed at 3pm BST and revealed that manufacturing activity in America grew at the same pace as in July, rather than slowing as expected.

Following the release, the US Dollar climbed to a new multi-decade high. Timothy Fiore, Chair of the ISM, observed that the economy had achieved a 27th consecutive month of growth, adding:

‘The US manufacturing sector continues expanding at rates similar to the prior two months. New order rates returned to expansion levels, supplier deliveries remain at appropriate tension levels and prices softened again, reflecting movement toward supply/demand balance.

Sentiment remained optimistic regarding demand, with five positive growth comments for every cautious comment.’

GBP/USD Exchange Rate Forecast: US Data to Drive Movement?

Looking ahead, a lack of UK data leaves the Pound US Dollar (GBP/USD) exchange rate to trade on US stimuli tomorrow.

Employment data for the world’s largest economy is likely to influence trading, with unemployment expected to remain unchanged as 300K jobs are added to the US economy. This would represent a lesser degree of hiring than in July, and a narrower participation rate.

Average hourly earnings are also expected to have grown in August by less than in the month prior, possibly denting USD sentiment. On the other hand, a disappointing release could draw safe-haven support toward the ‘Greenback’.

Meanwhile, further downbeat forecasts from UK politicians and researchers will likely continue to weaken the Pound against its peers, suggesting GBP/USD will trend down overall tomorrow.

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