GBP USD Tumbles Amid Risk-off Mood in Markets

GBP USD Sinks to 23-Month Low

The pound’s bright start to 2022 hit a dead-end last week, causing it to slide lower against the dollar. The UK currency remained in reverse gear on Monday amid risk-off trading that was prompted by US interest rate hike concerns and an impending Russian invasion of Ukraine – causing GBP USD to fall below 1.35 for the first time in more than two weeks.

The risk-off mood in markets appeared to overshadow a print that showed British business activity unexpectedly plummeted this month to an 11-month low – raising investor bets on a rate hike in February.

The IHS Markit/CIPS composite purchasing managers’ index (PMI) dropped to 53.4 from 53.6 in December – remaining above the 50 benchmark that divides contraction and growth. Economists had forecast a reading of 55.

“With inflationary pressures remaining elevated at near-record levels, this all adds to the likelihood of the Bank of England hiking interest rates again at its upcoming meeting,” Chris Williamson, chief business economist at IHS Markit, said.

Dollar benefits from risk-off mood in markets

The safe-haven dollar jumped in value on Monday as risk appetite in global markets waned amid rising geopolitical tension between Russia and Ukraine.

The US currency was given added impetus by a likely hawkish stance from the Federal Reserve at its policy meeting this week when the central bank is expected to signal the start of interest rate hikes in March.

Business activity in the US grew at its slowest pace in 18 months in January as a winter spike in Covid-19 infections intensified worker shortages at factories, though demand remained robust.

The IHS Markit flash US composite PMI output index, which captures business conditions in the manufacturing and services sectors, dropped to 50.8 this month from 57 in December – its lowest level since July 2020.

“Output has been affected by Omicron much more than demand, with robust growth of new business inflows hinting that growth will pick up again once restrictions are relaxed,” said Chris Williamson, chief business economist at IHS Markit.

US economic growth decreased in December for the first time since February, according to a gauge of overall economic activity and related inflationary pressure. The Chicago Fed National Activity Index tumbled to -0.15 in December from -0.44 in November.

Economic growth is expected to have gathered pace in the third quarter of 2022 but surging Covid-19 infections caused by the Omicron variant and high inflation are set to dent growth in early 2022.

Looking ahead

Three influential data sets are slated for release in the US today: the housing price index, the S&P/Case-Shiller home price indices and consumer confidence for January.

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