The British pound crashed to the lowest level since May 2020 as the latest UK GDP complicated the calculus for the Bank of England (BOE). The GBP/USD pair slipped to an intraday low of 1.2195 after the latest report by the Office of National Statistics (ONS).
Stagflation amid rate hikes
The GBP/USD pair declined sharply as investors reacted to the weak UK economic data. According to the ONS, the country’s trade deficit widened to more than 23 billion pounds in March. That increase was significantly higher than the median estimate of 18.05 billion pounds.
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The trade numbers came at a time when the UK is in a conflict with the European Union on North Ireland. A widening Brexit conflict will likely lead to more trade challenges at a time when the two sides are seeing robust supply chain issues.
Additional data revealed that the UK GDP contracted by 0.1% in March after it expanded by 0.1% in the previous month. Analysts were expecting that the economy remained stagnant.
Meanwhile, the manufacturing and industrial output slowed down in March. The two declined by 0.2% on a month-on-month basis.
Why did the GBP/USD crash?
Therefore, the GBP/USD pair declined because these numbers make it complicated for the Bank of England. The bank is cornered because of the difficulty involved in hiking interest rates in a period when the country is seeing stagflation.
Therefore, the most logical approach will be to pause any rate hikes and hope that inflation will start slowing. Data published on Wednesday by the US showed that inflation is easing albeit at a slower pace than expected.
On the other hand, the Federal Reserve has committed itself to continue hiking interest rates. Some officials have even hinted at hiking rates by 0.75% in the coming meeting. In a statement on Wednesday, Jeremy Siegel, the noted economist recommended that the bank should hike by 100 basis points.
So, what next for the GBP/USD pair? For now, the path of the least resistance for the pair is lower. However, a closer look shows that the pair has moved to extreme oversold levels. This means that it will likely have a relief rally in the coming weeks.
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Source: https://invezz.com/news/2022/05/12/gbp-usd-heres-why-the-british-pound-has-plummeted/