Pound US Dollar Exchange Rate Trades Narrowly

The Pound US Dollar (GBP/USD) exchange rate failed to find much demand on Tuesday as political uncertainty surrounding Liz Truss fails to inspire investors.

At time of writing the GBP/USD exchange rate traded around $1.1295, relatively unchanged from the morning’s opening levels.

Pound (GBP) Muted on Political Instability

The Pound (GBP) struggled to match the highs seen on Monday in the wake of Chancellor Jeremy Hunt’s mini-budget dismantling. With the spark fizzing out, investors are now concerned with the political instability surrounding Prime Minister Liz Truss.

With Truss sacking Chancellor Kwasi Kwarteng, his own appointment just over a month ago, Jeremy Hunt replaced him and subsequently reversed most of the measures from the mini-budget. U-turning on the most damaging and unfunded tax cuts managed to calm jittery markets, Hunt’s fiscal plan did calm markets, but also undermined Truss’ credibility.

Further damaging her credibility, and investor confidence, is Truss refusing to commit to an earlier election promise. The guarantee for pension funds to rise in line with inflation, earnings, or 2.5%, whichever is greater, was a hallmark in the 2019 Conservative manifesto. Truss also confirmed she was committed to it two weeks ago, has now refused to commit. The spokesperson for Truss said:

‘We are very aware of how many vulnerable pensioners there are. And, indeed, our priority ahead of this fiscal plan will be to ensure we continue to protect the most vulnerable in society.

‘The chancellor has been clear, the prime minister and the chancellor are not making any commitments on individual policy areas at this point.’

Further weighing on the Pound was confirmation from the Bank of England (BoE) who refuted the earlier reports of further assistance from the central bank. GBP investors were buoyant on the Financial Times’ reports that the BoE will be set to delay the start of quantitative tightening (sale of government bonds). The BoE released a statement denying these claims:

‘This morning’s FT report that the BoE has decided to delay MPC gilt sales is inaccurate.’

US Dollar (USD) Exchange Rates Subdued Despite Mounting Global Recession Fears

Meanwhile, the US Dollar (USD) failed to find much demand on Tuesday despite global recession fears brewing.

Concerning news from China weighed on investors’ spirits as the release of Q3 GDP data has been delayed. Amid the week-long Communist Party congress, key economic data has been pushed back. Fears of a worsening Chinese economy is exacerbating global recession fears amid further slowdowns in the world’s second largest economy.

Elsewhere, the US Secretary of State Antony Blinken has warned that China is stepping up their plans to seize Taiwan. China’s Premier Xi Jinping made clear that Taiwan remains central to his plans for a ‘rejuvenated China’. Blinken added:

‘Instead of sticking with the status quo that was established in a positive way, (Beijing has made) a fundamental decision that the status quo is no longer acceptable, and Beijing is determined to pursue reunification on a much faster timeline.’

GBP/USD Exchange Rate Forecast: UK Inflation to Bolster Sterling?

Looking ahead, the Pound US Dollar exchange rate could see further movement with the printing of UK headline CPI. Expectations of inflation rising above double digits, with forecasts of a new record high, could bolster interest rate hike expectations.

Meanwhile, the US Dollar could see fluctuations on a flurry of data releases. Without much major data on the calendar, the Federal Reserve will be looking at the state of the US economy to further gauge rate hikes.