Pound US Dollar Exchange Rate News: GBP/USD Weakened on Fears over UK Economic Growth Plans

January 27, 2023 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Weakened on Fears over UK Economic Growth Plans

Pound (GBP) Slipped on Economic Growth Concerns

The Pound (GBP) struggled for demand on Friday amid a lack of economic data. An uninspiring speech from Chancellor Jeremy Hunt failed to inspire confidence ahead of the interest rate decision from the Bank of England (BoE) next week.

With economists and analysts predicting a torrid year for the UK economy, Hunt attempted to allay those fears with the Conservative’s growth plan. However, investors were not confident, and Sterling subsequently dropped. Ahead of the spring budget, Hunt laid out his plans, citing Brexit as a growth tool rather than a hinderance. The biggest takeaway was that the best tax cut in these times is a cut to inflation.

Hunt also tried to sound optimistic when talking about the current financial and economic strain the UK finds itself in. Comparing the UK to 14 countries worse off, Hunt criticised the wave of ‘declinism’ in the face of supposed favourable growth statistics. During the speech at Bloomberg, Hunt set out the UK government’s plans to grow the economy and focused on economic inactivity as one such obstacle. Those who have retired early or haven’t been unable to find work since the pandemic, Hunt added that the UK ‘needs them and will look at conditions to make it worth their while’.

Lending some modest support, however, is the expectation of the BoE to keep on their current rate hike cycle. With inflation remaining far too high above the target rate of 2%, investors are expecting the central bank to raise interest rates at the next meeting.

US Dollar (USD) Supported by Strong GDP Growth

Meanwhile, the US Dollar (USD) traded with mixed success on Friday as inflation PCE in the US printed to forecasts and declined as expected. Despite tempered rate hike bets, a resilient economy gave some modest strength on the back of better-than-expected GDP growth data.

Core Personal Consumption Expenditures, the Federal Reserve’s preferred measure of inflation, declined on a yearly basis to 4.4%, down from 4.7%. Monthly, the figure increased by 0.3%, marking the slowest increase in 14 months. With inflation continuing to cool across the board, further evidence for the Fed to finally slow their rate hike cycle could be deterring investors. Traders now see just a one in three chance of another 25bps rate hike after the February meeting.

Further weighing on the US Dollar, is the moderately improved risk appetite, sapping demand for riskier currencies.

GBP/USD Exchange Rate Forecast: Interest Rate Decisions to Boost Sterling?

Looking ahead to next week and the Pound US Dollar exchange rate could see further movement with the release of both the Fed and BoE rate decisions. An expected divergence between the two could see further daylight between the pairing. With inflation peaking in the US, the Fed could oversee the final rate hike of the current cycle.

Meanwhile, with inflation remaining sky-high for the UK, the BoE still has a long way to go before slowing their tightening cycle. However, the dire economic outlook for the UK would likely keep Sterling under wraps. Economists at Danske Bank predict a dovish statement to accompany the rate decision next week:

‘In its statement we expect the BoE to highlight the dire state of the UK economy lending support to our call that market pricing is too aggressive currently pricing a peak in the Bank Rate at 4.40% by June 2023.’

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TAGS: Pound Dollar Forecasts