The pound has held on to its gains against the US dollar and could continue to recover in the coming days if upcoming UK economic data is positive. Bank of England expectations have also added support. Any remarks from Federal Reserve and Bank of England policymakers will also provide direction. On Monday, BoE speakers Jonathan Haskel and Catherine Mann could also influence.

Global markets

Fears of a possible global recession have weighed over the global stock markets on Monday, as economic data disappointed, and inflation continued to climb. Last week, stock markets dropped to their lowest in two years, as investors worried that global central banks’ intention to hike faster and further interest rates to curb inflation could push economies into recession. Joe Biden’s treasury secretary Janet Yellen said that she anticipates “the economy to slow” and said that a recession was not “at all inevitable.” Speaking to ABC’s This Week host George Stephanopoulous Yellen explained that the economy has “been growing at a very rapid rate, as the labour market has recovered, and we have reached full employment. It’s natural now that we expect a transition to steady and stable growth, but I don’t think a recession is at all inevitable.”

Bank of England interest rate hikes

In the meantime, market expectations of UK interest rate hikes could be too high. As Deutsche Bank economists have noted: “The continued rise in inflation rates in connection with already slowing economic growth is generating headwinds for the GBP and concerns for the Bank of England.”

Economists at ING have also noted similar risks to the pound. As they said: “Supported Bank of England rate expectations have provided a floor for now. We continue to see some risks that we’ll see some dovish re-pricing of those rate expectations, but for now, that may only come from some explicit pushback by any of the BoE speakers scheduled this week (we’ll hear from Jonathan Haskel and Catherine Mann today). That’s because on the data side we could see yet another modest acceleration in headline inflation, while the core rate may stay above 6.0%.”

While the Bank of England and economists might disagree with the market's increasingly “hawkish” expectations for more UK interest rates, such expectations, however, have provided a considerable increase to the pound to US dollar exchange rate.

Analysts have warned that the pound could fall against the US dollar if market concerns about a global recession are exacerbated by possible remarks this Wednesday and Thursday from Fed Chairman Jerome Powell, or other Federal Open Market Committee members. 

The Fed and other central banks are striving to curb inflation and have side-lined other concerns such as the condition of the labour market and employment.

When Powell speaks this week at his semi-annual testimony to Congress, analysts anticipate that he will underline the importance of the Fed’s goal to control inflation and the need for restrictive policy settings.

In the UK, inflation data out on Wednesday and other macroeconomic data including Thursday’s S&P Global Flash PMI surveys of the services and manufacturing sectors and Friday’s retail sales report for May will be the key drivers for the pound.

With the current volatility and concerns about an economic slowdown, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.