Pound tumbles yesterday on recession fears
Daily Currency Update
The UK PMI release yesterday came in weaker than expected, heightening concerns around a recession in the UK in the near future. GBPUSD dropped 1% to session lows in the high 1.24's, while GBPEUR dropped 1.2%. Investors predict that with UK services activity slumping to a 15-month low with the cost of living crisis worsening, Bank of England chief Andrew Bailey won't be able to increase interest rates sufficiently to curb inflation.On Monday, Bailey stated that the cost of living crisis would be factored into policy decisions made by the central bank. This hinted at the fact that though inflation could soon hit double digits, the UK central bank is not willing to raise rates to control inflation too quickly. This would squeeze households who have mortgages even further, during a time when they are already being hit by raising energy prices.
With this backdrop of slowing growth, rising inflation and a central bank unwilling to be too 'hawkish' to stem inflation, there is plenty of concern for the pound in the coming months. A number of banks are still forecasting the pound to drop versus the US dollar below 1.20. However, in some better news for the UK economy, analysts are saying there are some signs that the rate of inflation could soon peak. Companies are reporting price resistance from customers, and it is likely that the slowing in demand will help pull prices down in coming months.
Key Movers
Yesterday saw the Chair of the Federal Reserve, Jerome Powell, state that there would need to be clear evidence that inflation is slowing before the US central bank would consider changing its path of monetary tightening. However, he also stated that the recent cooling in growth in the US could be a factor in lowering prices naturally and hence easing pressure on the Federal Reserve having to raise interest rates.US PMI data, as with the UK, indicated a slower expansion in business activity across the US private sector during May. Manufacturers and service providers signalled softer upturns in output amid elevated inflationary pressures, reporting 4-month lows in both services and manufacturing PMI. There is some concern in the US that what were once robust growth indicators, are now slowing.
The US dollar, which has been on the front foot in the last few months, has more recently been under pressure, and this news could carry this trend on. However, with plenty of global risk stories, including the Chinese Covid-based lockdowns and also the ongoing war in Ukraine, the US dollar could continue benefitting from a general lack of global risk appetite.
The euro has recently benefitted from the ECB pivoting from its dovish stance to tee up rate hikes starting from Q3 this year, which could see the end to its negative interest rates in July. With robust growth indicators, including better than expected PMI data yesterday, the Eurozone looks ready to take off on its monetary tightening cycle. However, with a backdrop of its proximity to the war in Ukraine, and rising inflation, there could be a bumpy road ahead for the euro as views change.
Expected Ranges
- GBP/EUR: 1.1680 - 1.1765 ▼
- GBP/USD: 1.2460 - 1.2645 ▲
- GBP/AUD: 1.7540 - 1.7735 ▲
- EUR/USD: 1.0520 - 1.0690 ▼