Pound US Dollar (GBP/USD) Exchange Rate Falls amid Dour UK Outlook

January 10, 2023 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Falls amid Dour UK Outlook

Pound US Dollar (GBP/USD) Exchange Rate Slips as UK Outlook Remains Dour
The Pound US Dollar (GBP/USD) exchange rate fell on Tuesday, as a lack of macroeconomic data prompted GBP investors to examine domestic issues.

At the time of writing, GBP/USD traded at around US$1.2139, a fall of roughly 0.4% from Tuesday’s opening rates.

Pound (GBP) Slips as Investors Remain Gloomy Over UK Outlook

The Pound (GBP) struggled for support on Tuesday, as UK investors remained focused on headlines across the country.

The UK economic outlook continued to seem downbeat, as businesses across the country began to outline how the government’s proposed shift in energy price support would impact them.

Many businesses stated that it would increase the risks of their closure, as the support wouldn’t be enough to fully assist with the cost of energy. Furthermore, as the country is in recession it provides a further pressure on businesses that they may not be able to weather.

Alex Hall-Chen, a Policy Adviser at the Institute of Directors (IoD) stated:
‘The design of the new scheme will also provide less certainty for businesses in budgeting. Given that future energy costs will no longer be able to be projected with any degree of confidence, the willingness of directors and auditors to sign off their entities as going concerns will be impaired. In the case of the most vulnerable SMEs, this may affect insolvency assessments and lead some companies to cease trading altogether.’

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Furthermore, following the breakdown of negotiations between union leaders and ministers, the UK government is looking to introduce a bill which forces minimum service. This bill could prove controversial and lead to more strikes, which may place further pressure on GBP.

US Dollar (USD) Ticks Upward as Investors Await Fed Chair Powell Speech

The US Dollar (USD) ticked upwards on Tuesday, as investors awaited the latest speech from Federal Reserve Chair Jerome Powell.

With the US economy beginning to slip and the labour market remaining tight, if Powell continues to strike a hawkish tone, it may run against the benefit of the US economy. However, inflation still remains above the Fed’s desired 2% target, meaning that interest rate hikes are likely to continue.

Currently, interest rate hike bets remain muted, with markets broadly expecting that the Fed will begin to slow the pace of tightening in the short term, and deliver a 25 bps increase in February.

Pound US Dollar (GBP/USD) Exchange Rate Forecast: US Inflation in Focus

Looking ahead for the US Dollar (USD), the core driver of movement is likely to come from Thursday’s inflation release. Reflecting the figure in December, headline and core inflation are expected to fall. Headline inflation is forecast to drop from 7.1% to 6.5%, while core inflation is expected to slip from 6% to 5.7%.

As such, the US Dollar (USD) could weaken by suggesting the Federal Reserve could begin to relax their current tightening policy. Furthermore, the data could run in countenance to the Fed’s persistently hawkish towards inflation and prompt uncertainty among investors, which could further affect the US Dollar.

For the Pound (GBP), trading conditions are thin through to Friday. As such, domestic headlines in the UK may be the focus for investors in the short term. Industrial action remains a pressure point for the Pound, after talks between ministers and unions broke down on Monday. As such, any further walkouts could continue to cap Sterling’s gains as they continue to impact the economy.

Furthermore, the UK government has altered their energy price support package for UK businesses. With this in mind, further discussion from businesses of how it may impact their profits and outlook could dent GBP.

Risk appetite may also affect the pairing. Due to the Pound’s increasingly risk sensitive nature, an upbeat market mood could lift Sterling against its peers.

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