As Fears of a Recession in the UK Increase, the GBP/USD Exchange Rate Continues to Drop

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EnclaveFX Ltd
Jun 24, 2023
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  • A slowing global economy and BoE's unexpected rate hike of 50 basis points have sparked fears of a UK recession after GBP/USD fell to around 1.2700 as a result of the unexpected rate hike.
  • S&P Global Manufacturing PMI for the US dropped to 46.3 from 49.1 in April, raising concerns about the possibility of a "hard landing" in spite of steady economic performance despite the increase in interest rates.
  • In the UK, recession fears have been exacerbated as consumer confidence has declined and the Bank of England has hinted at an interest rate hike of 6%.

Following data showing business activity deceleration in the UK, GBP/USD dropped 0.30 percent, meandering at around 1.2700. The Pound Sterling (GBP) has been hit hard by that along with an aggressive 50 bps rate hike by the Bank of England (BoE) in response to stubborn inflation. At the time of writing, the pair is trading at 1.2709.

An aggressive rate hike from the Bank of England causes economic concerns, resulting in bearish sentiment

This week is expected to be a loss-making one on Wall Street. Risk aversion is expected to emerge as readings of business activity across Europe and the United States (US), while remaining in expansionary territory, have slowed down, giving rise to recessionary fears. According to the US S&P Global Manufacturing PMI, which plummeted to 46.3 in March, below the previous month's reading, while the Services and Composite PMI increased to 54.1 and 53, respectively, but both numbers were below expectations.

According to Chris Williamson, the Chief Economist of S&P Global Market Intelligence, "The overall expansion of business activity in the US held steady in June and was consistent with the growth of GDP at a rate of 1.7%, which is consistent with a growth in the region of 2% for the second quarter."

As a matter of fact, it should be noted that the US economy has fared well in the wake of 500 basis points (bps) of rate increases, as indicated by data on employment, housing, and growth. A possible “hard landing” may arise if business activity deteriorates, as the Federal Reserve (Fed) Chair Jerome Powell stressed that the Fed needs to increase interest rates a few times in the future.

The US Dollar Index (DXY), a measure of the dollar's value against its peers, rises 0.50%, up to 102.909, as the US Treasury bond yields continue to decline, thus capping the British Pound's fall over the 1.2700 mark.

While investors were surprised by the Bank of England's 50 basis point rate hike, market participants see rates in the UK could rise as high as 6%. Although an interest rate increase usually boosts the country's currency, investors' fears of a recession caused a different reaction.

As far as data is concerned, consumer confidence deteriorated, and S&P Global/CIPS PMIs expanded slower than they did last year, except in manufacturing. The positive news is that UK retail sales rose in May, boosted by an extra bank holiday. However, the study also found that consumers are facing a high level of inflation and are squeezing their spending power as a result.

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