GBP USD Exchange Rate Sinks to Two-Year Low 

GBP USD Exchange Rate Sinks to Two-Year Low 

The pound’s rally against a strengthening dollar was fleeting as market optimism evaporated on Tuesday, causing GBP USD to tumble below 1.20 – hitting its lowest level since March 2020. 

Growth among British businesses in the services and manufacturing sectors was slightly more robust in June than initially expected by economists. However, further signs that sky-high inflation is dragging on new orders raised fears of a recession, a survey showed on Tuesday. 

The composite S&P Global/CIPS purchasing managers index (PMI) nudged to 53.7 from the June reading of 53.1. A PMI for Britain’s powerhouse service sector rose to 54.3, compared to the “flash” reading of 53.4. 

Speaking after the publication, Tim Moore, economics director at S&P Global Market Intelligence, commented that while the service sector remained in an expansion mode during June, high inflation remains, denting discretionary spending and negatively influencing demand projections across the board. 

A stark warning from the Bank of England (BoE) reviewed the financial outlook for the UK and global markets in its quarterly financial stability update, published on Tuesday. 

“Since the last financial stability report, the global economic outlook has deteriorated markedly,” said BoE governor Andrew Bailey. “Developments in the Russian invasion of Ukraine have been a key factor affecting the global outlook.” 

The British central bank’s quarterly summary arrived against a backdrop of red-hot inflation, with consumer prices at their highest level in 40 years. 

Safe-haven dollar strengthens

The safe-haven dollar was back in favour with risk-averse investors as US markets reopened on Tuesday, buoyed by the Federal Reserve’s aggressive rate hike regime. 

Having lifted benchmark interest rates by three-quarters of a percentage point last month, Fed Chair Jerome Powell said the central bank could raise borrowing costs at a similar pace at its next meeting. 

New orders for goods manufactured on home soil increased more than expected in May, showing demand for products remains robust even as the Fed wrestles with inflation. 

US factory orders rose 1.6% in May after increasing 0.7% in April; the Commerce Department reported on Tuesday – outstripping economists’ forecast for a 0.5% rise. 

Looking ahead

Two BoE officials will make speeches on Wednesday: Chief Economist Huw Pill and Deputy Governor for Financial Stability Sir Jon Cunliffe. 

A raft of economic indicators will release in the US on Wednesday: S&P Global composite PMI, S&P Global services PMI, ISM services PMI, and JOLTS job openings. 

The Fed will also keep investors busy, with the president of the Federal Reserve Bank of New York, John C. Williams, scheduled to speak and the US central bank publishing the minutes from last month’s policy meeting. 

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