GBP/USD continues to drop amidst UK recession fears

• GBP/USD falls to around 1.2700 as BoE’s unexpected 50 bps rate hike and slowing global business activity sparks UK recession fears.
• US S&P Global Manufacturing PMI falls to 46.3, raising concerns about a possible “hard landing” despite steady economic performance amidst rate increases.
• Recession worries in the UK heightened with decreasing consumer confidence and a potential 6% interest rate hike from the BoE.

GBP/USD extended its losses in the late New York session, dropping around 0.30% meanders at around 1.2700, amid growing recession woes in the UK as data showed business activity deceleration. That, alongside an aggressive 50 bps rate hike by the Bank of England (BoE) as a response to stubborn inflation, weighed on the Pound Sterling (GBP). At the time of writing, the GBP/USD exchanges hands at 1.2709.

Bearish sentiment persists as Bank of England's aggressive rate hike stirs up economic concerns

Wall Street is set to finish the week with losses. Risk aversion surfaced as readings of business activity across Europe and the United States (US), although remaining at expansionary territory, it slowed down, spurring recessionary fears. The US S&P Global Manufacturing PMI plunged to 46.3, below the prior month’s data, while the Services and Composite PMI expanded by 54.1 and 53, but both numbers were below the forecasts.

Chris Williamson, the Chief Economist of S&P Global Market Intelligence, commented, “The overall rate of expansion of business activity in the US remained robust in June, consistent with GDP rising at a rate of 1.7% to put second-quarter growth in the region of 2%.”

It should be said the US economy so far fared well amidst 500 basis points (bps) of rate increases, as shown by growth, housing, and labor market data. However, business activity deterioration could put into play a possible “hard landing,” as the Federal Reserve (Fed) Chair Jerome Powell stressed the need for a couple of interest rate increases.

The US Dollar Index (DXY), a measure of the buck’s value against its peers, advances 0.50%, up at 102.909. US Treasury bond yields continued to drop, capping the GBP/USD’s fall above the 1.2700 figure.

On the UK front, the BoE’s 50 bps rate hike surprised investors. , while market participants show rates in the UK could rise as high as 6%. Even though an interest rate increase usually would boost the country’s currency, recession fears caused a different reaction.

Data-wise, consumer confidence deteriorated, and S&P Global/CIPS PMIs expanded slower, except for Manufacturing. On the positive side, UK retail sales surprisingly rose in May, bolstered by an extra bank holiday. However, it also suggested that most consumers deal with high inflation as they squeeze their spending power.

GBP/USD Technical Levels