GBP USD Exchange Rate Sinks Below 1.27

GBP USD Exchange Rate Sinks Below 1.27

The pound’s recent demise entered new depths on Tuesday after it sunk into the 1.26 range against a broadly firm dollar for the first time since July 2020.

Concerns about Britain’s economic outlook deepened following the release of government debt numbers and mounting fears that Covid-19 restrictions in China will dent the global economy.

Data from the Office for National Statistics showed that British government borrowing during the 2021/22 financial year was almost 20% higher than the consensus.

The figures highlighted the challenge facing chancellor Rishi Sunak, who is under pressure to offer fresh financial support to households and businesses hit by sky-high inflation, despite the amount of new debt held by the government.

The pound was also weighed down by interest rate expectations amid fears of a recession and a slowdown in the jobs market. Money markets continued to scale back bets on the amount the Bank of England (BoE) will tighten policy, pricing in around 141 basis points worth of hikes by year-end compared to 150 on Monday.

Despite Britain’s cost of living crisis, and its impact on economic growth this year, the BoE is still preparing to lift borrowing costs next week for a fourth consecutive meeting – but the pound may struggle to gain traction if it does.

Dollar boosted by risk-off mood

The safe-haven dollar was buoyed on Tuesday by fears that new Covid-19 measures in China could slow down the global economy and fears of aggressive Fed tightening, which sapped risk sentiment.

Residents across Beijing are waiting to be tested for Covid-19 after officials ramped up plans for mass-testing of 20 million people, fuelling worries about a potential lockdown.

Markets are also growing anxious that aggressive policy tightening by the Federal Reserve might derail the global economic recovery – which has only just started. The US central bank is expected to hike rates by half a percentage point at each of its next two meetings.

Investors in the dollar digested a mixed bag of data on Tuesday, with US consumer confidence edging down in April and bookings for durable goods climbing in March.

Looking ahead

It’s a quiet day on the economic data front on Wednesday. US pending home sales, published by the National Association of Realtors, is the only release of note from either side of the Atlantic.

A lack of data from the UK economy this week means the pound will be taking its cues from the dollar’s performance and interest rate speculation.