GBP USD Exchange Rate Slumps to 21-Month Low

GBP USD Exchange Rate Slumps to 21-Month Low

The pound’s week went from bad to worse on Wednesday after it slumped to a 21-month low against the dollar.

GBP USD slipped into 1.25 territory for the first time since July 2020 as storm clouds continue to gather over Britain’s economy and government borrowing exceeded expectations – conditions that combined to dampen the Bank of England’s (BoE) policy tightening narrative.

The subsequent trend in money markets this week has been to scale back bets on the size of BoE rate hikes: last Friday, 160 basis points (bps) worth of tightening by year-end was being priced in, by Tuesday evening that was down to 140 bps.

Data published last week revealed a slump in British retail sales in April, reflecting the cost-of-living squeeze and adding to signs of an economic slowdown.

Data published on Tuesday showed government borrowing in the last financial year was almost 20% higher than the consensus.

Rate expectations and risk sentiment support dollar

The dollar was riding high on Wednesday, supported by expectations of aggressive Federal Reserve rate hikes and safe-haven demand.

Risk sentiment tailwinds continue to be generated by uncertainty around the war in Ukraine – now in its third month – as well as the global impact of China’s persistence with fresh Covid measures.

Concerns about Chinese growth have been fuelled by ongoing lockdown restrictions in the financial hub of Shanghai and the mass-testing of 20 million people in Beijing.

The number of houses under contract in the US declined in March for the fifth consecutive month as demand was dented by higher mortgage rates, data from the National Association of Realtors (NAR) showed on Wednesday.

The pending home sales index – a gauge of home sales based on contract signings – dropped 1.2% to 103.7 in March, the lowest reading since May 2020 when the pandemic was ravaging the economy. Economists had forecast sales to fall 1.8%.

NAR’s chief economist, Lawrence Yun said: “The sudden large gains in mortgage rates have reduced the pool of eligible homebuyers, and that has consequently lowered buying activity,”

Looking ahead

First-quarter GDP hits the headlines on Thursday, which is forecast to have grown at an annualised pace of 1% in the first three months of the year. If the consensus plays out, it will mark a steep decline compared with the 6.9% growth pace in the fourth quarter of 2021 and will represent the worst three-month period since the pandemic recession in 2020.

Initial jobless claims for the week ended 22 April are also slated for release on Thursday. New filings for unemployment benefits are expected to have dipped to 180,000 from 184,000 the previous week – a near 54-year low.