The pound has weakened on Thursday as recession fears hit markets, while Brexit concerns, UK politics, and BoE’s unwillingness to hike interest rates aggressively have also weighed on the pound. Analysts have noted that the UK by-election results and Fed Chairman Jerome Powell’s testimony later on Thursday will be crucial.

At the time of writing, we got the release of UK preliminary PMI for June. The UK Manufacturing PMI dropped to 53.4 in June, but Services PMI came better than expected at 53.4, offering support to the GBP/USD currency pair.

Recession fears weigh on markets

A recession would weigh on Britain’s public finances, affecting tax revenues and increasing welfare spending. The worries about an economic slowdown have also pushed stocks down with the FTSE 100 index losing 70 points, going down to 7018 points, close to last week’s three-month low. The German DAX has lost 0.5%, while the French CAC was 0.6% lower and Italy’s FTSE MIB was down 1%.

Economists and investors are worried that Central Banks’ fight against inflation with interest rate increases could push economies into recessions. Yesterday, the US central bank chief Jerome Powell said the Federal Reserve was determined to bring prices under control, even if it risked an economic downturn.

Following Jerome Powell’s testimony yesterday, Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said that it was unsurprising that market optimism would be hurt as Powell warned that a recession was possible and that there was the risk of the Federal Reserve failing to restore price stability and allowing inflation to become entrenched in the economy.

Boris Johnson and UK by-elections

The pound has also been weighed down by growing pessimism around UK PM Boris Johnson’s Conservative leadership. On Thursday, we have two by-elections happening in Wakefield, West Yorkshire, and Tiverton and Honiton in Devon. The Financial Times reported that, “The Conservatives are braced to lose two parliamentary by-elections, according to senior party strategists, in moves that could prompt a renewed backlash against Boris Johnson.”

The two by elections will highlight the challenges faced by the Liberal Democrats and the Conservatives. The Liberal Democrats could challenge the Conservatives’ seats in the South of England, as well as in the rural constituency of Tiverton and Honiton where the Conservative party won a huge majority in the past. Both seats are very similar demographically and politically and there are high hopes that the Liberal Democrats could prove to be victorious.  

Additionally, markets are concerned with Brexit impacting on the British workers and fishers which could also keep the pound down.

Bank of England and interest rate hikes

In the meantime, the Bank of England’s reluctance to proceed with higher interest rate hikes will add further weight on Sterling. On Wednesday, the UK Consumer Price Index (CPI) reached to 9.1% YoY, which was lower than expected by markets. On Thursday, the UK S&P Global/CIPS Manufacturing PMI fell to 53.4 from 54.6 while the Services PMI came as previously at 53.4, and higher than the 53 that was expected.

Investor pessimism

According to analysts at NatWest Markets, peak investor pessimism towards the pound has been reached, which means there will be limited downside for the UK currency against both the euro and the US dollar. They said that the pound's prospects will depend on whether the market has priced in a slowdown in the economy and that UK growth expectations will continue to be one of the main drivers of the pound’s performance.

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