GBP USD Exchange Rate Plunges to Lowest Since September 2020

GBP USD Exchange Rate Plunges to Lowest Since September 2020

The pound was stuck in reverse at the start of the week, moving to its lowest level since September 2020 against a strengthening dollar.

The UK currency’s retreat into the 1.27 range was compounded by diminishing interest rate expectations after money markets reduced their bets on future monetary policy tightening from the Bank of England (BoE).

Money markets are currently pricing around 150 basis points of BoE rate rises by the end of the year, including more than 25 basis points at the May policy meeting next week – as recently as Friday, they were pricing in 160 basis points.

Optimism among British manufacturers has dropped at its fastest pace since the Covid-19 crisis struck in March 2020, with orders slowing and prices increasing, adding to signs the brakes are being applied to the economy.

The Confederation of British Industry’s (CBI) quarterly measure of confidence among manufacturers plummeted to -34% from -9% in the three months to January – its lowest in two years.

Anna Leach, CBI deputy chief economist, explained the dip in morale among factory firms: “Manufacturing orders and output continue to grow, albeit at slower rates. But the war in Ukraine is exacerbating the Covid-related supply crunch, with cost increases and concerns over the availability of raw materials at their highest since the mid-1970s. It’s little wonder that sentiment has deteriorated sharply over the past three months and manufacturers are now scaling back their investment plans.”

Dollar supported by waning risk sentiment

The dollar benefitted from a gust of risk aversion tailwinds on Monday, boosting its safe-haven appeal.

The ongoing war in Ukraine and mounting concerns of a China-wide Covid-19 outbreak sparked a scramble for safety, with investors seeking shelter in the US currency.

With the Russian invasion of Ukraine entering a third month, the risk-off mood in markets could keep the dollar supported before the Federal Reserve’s May policy meeting next week.

The Chicago Fed national activity index – a monthly index designed to gauge overall economic activity and related inflationary pressure – rose slightly more than expected last month.

The Federal Reserve Bank of Chicago’s March index printed +0.44 compared to the +0.40 consensus and +0.51 in February.

Looking ahead

A slew of notable data sets are slated for release from the US economy on Tuesday: durable goods orders, nondefense capital goods orders (excluding aircraft), housing price index, S&P/Case-Shiller home price indices, consumer confidence and new home sales.