The pound fell to over a two-week low on Friday, after recession fears and the prospect of aggressive Fed rate hikes helped to strengthen the safe-haven US dollar. According to the latest survey, British manufacturing lost steam adding to signs that the economy is grinding to a halt.

Fed hawkish outlook

The decline of the pound could continue further in the near-term, analysts have warned. The Federal Reserve’s determination to rate hikes aggressively and curb rising inflation, combined with the widespread risk-off mood, pushed the dollar higher. Speaking at the ECB Forum earlier this week, Fed Chair Jerome Powell referred to more aggressive rate hikes and the Fed’s focus on getting inflation under control.

Recession fears

The Fed's hawkish outlook has sparked market concerns that faster rate hikes and tighter financial conditions would hurt global economic growth. Additionally, a further escalation in tensions between the West and Russia in response to the invasion in Ukraine have added to fears of a possible recession.

Such concerns have hurt risk sentiment and turned investors to safe-haven assets, including the US dollar. The pound was also weighed by expectations that the Bank of England would take a slower approach to raising interest rates and Brexit concerns over the Northern Ireland Protocol.

UK Manufacturing PMI disappoints

Another sign that the economy is slowing is the latest S&P Global / CIPS UK Manufacturing PMI report. UK manufacturing growth lost momentum with the manufacturing PMI down to 52.8 from 54.6 in May. That’s more disappointing than the preliminary “flash” reading of 53.4 in June and is close to the 50-point mark which shows stagnation.

The report showed that business optimism hit a two-year low last month, while activity rose at the slowest pace in two years, with new orders dropping for the first time since January 2021. The consumer goods sector was affected the most as there was less demand from households due to the cost-of-living crisis.

Companies blamed the weaker economic outlook, decreased new export order intakes, a decline in domestic demand, the war in Ukraine, raw material shortages and the slowdown in China.

The ongoing Brexit-related obstacles and weaker growth hurt orders from the EU as new export orders contracted for the fifth month in June.

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply also blamed Brexit trade tensions affecting factories: “New order levels fell for the first time since January 2021 and interest particularly from export markets faded away for the fifth month in a row. Supply chain managers reported that ports and paperwork were their undoing in June with Brexit a thorn in the side of manufacturers combined with weaker domestic demand, inefficient performance in supply chains and an overall shaky UK economy.”

In the short term, analysts have noted that the pound will possibly extend its decline against the US dollar, unless there is a noticeable improvement in risk sentiment.

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