Pound US Dollar Exchange Rate News: GBP/USD Soured on UK Growth Concerns

January 25, 2023 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Soured on UK Growth Concerns

Pound (GBP) Under Pressure from Domestic Headwinds

The Pound (GBP) struggled for demand on Wednesday as a warning from the Office for Budget Responsibility (OBR) could see Chancellor Jeremy Hunt scaling back his growth plans for the UK.

With government borrowing surging in December, the highest December on record, Hunt could be left with a financial black hole when the spring budget comes around. Hunt’s plans for medium-term growth for the UK now hang in the balance, the modest optimism for the UK’s economic outlook wanes.

Political instability is never far away for the UK, and once again the uncertainty surrounding the Conservative party weighed on the Pound. Mounting calls for Nadhim Zahawi’s resignation is piling pressure on Prime Minister Rishi Sunak, and in turn, Sterling. The latest controversy embroiling the Tories edges a general election ever closer. A return to volatility over the UK’s leadership could keep downward pressure on the Pound.

However, expectations of the Bank of England (BoE) continuing their rate hikes, in contrast to the majority of major banks beginning to slow, could be preventing the Pound from sinking further. Inflation remains far above the target rate, which could force the BoE to keep aggressively raising interest rates.

US Dollar (USD) Undermined by Choppy Market Conditions

Meanwhile, the US Dollar (USD) experienced mixed success against its peers on Wednesday morning as a lack of major economic data left investors indecisive.

Lending some modest support to the US Dollar are elevated rate hike expectations. Tuesday’s PMI data showed the US economy continues to be under pressure as both the manufacturing and service sector remained in contraction territory.
However, the ‘Greenback’ was buoyed over expectations of further rate hikes from the Federal Reserve. Chris Williamson, Chief Business Economist at S&P Global, commented on the data:

‘The rate of input cost inflation has accelerated into the new year, linked in part to upward wage pressures, which could encourage a further aggressive tightening of Fed policy despite rising recession risks.’

GBP/USD Exchange Rate Forecast: US GDP Growth to Buoy the Greenback?

Looking ahead, the Pound US Dollar exchange rate could see further movement with the release of GDP growth data for the US. An expected expansion of the economy could see the ‘Greenback’ climb further. Early estimates predict the economy to have grown 2.6% QoQ, marking the second straight quarter of growth. A strong economy could bolster further rate hike expectations from the Fed.

Meanwhile, the Pound could come under increased pressure if Nadhim Zahawi was to step down, as he would become the latest Tory to leave their post prematurely. Likewise, if Zahawi was to remain, Sunak would come under increased pressure from opposition. Political volatility for the UK could weigh heavily on Sterling.

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TAGS: Pound Dollar Forecasts