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More Losses for the British Pound as Recession Risks Burn Brighter says Deutsche Bank

  • USD pushes fresh highs
  • GBP under water again
  • Global investor sentiment suppressed
  • UK recession risks increasing

UK recession risks grow, undermine the Pound

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The British Pound was left floundering against the Euro and Dollar amidst souring global investor sentiment and increasing fears the UK economy could suffer a recession.

"The U.S. dollar rolled to fresh multiyear highs, a sign of still skittish sentiment amid worries about prospects for the world economy," says Joe Manimbo, Senior Market Analyst at Western Union.

The Pound is traditionally a 'risk off' currency that loses value when global stock markets are falling and general investor sentiment is poor.

Fears for a major global growth slowdown in light of increasing Covid lockdowns in China are currently said by analysts to be the main driver of the latest investor gloom.

Beijing looks set to follow Shanghai into a strict lockdown and some economists warn this could even tip the world's number two economy into recession.

But concerns over the outlook for the UK economy are also growing, and this could explain why the Pound is currently one of the worst performing of the world's major currencies.

"Sterling hovered around its lowest level in more than 1½ years against the greenback as steady signs of a slowing British economy suggested less latitude for the Bank of England raise interest rates to fight the highest inflation in decades," says Manimbo.

The Pound to Dollar exchange rate fell another half percent to trade at 1.2680 while the Pound to Euro exchange rate fell back 0.12% on the day to trade at 1.1875. (Set your FX rate alert here).

But losses also came against the Yen, Franc, Rand, Australian and New Zealand Dollars, confirming a general dislike for the UK currency.

Economists at Deutsche Bank today warn recession risks in the UK are rising as the cost of living rises and squeezes households.

Sanjay Raja, Senior Economist at Deutsche Bank, says "recession warnings are burning brighter," in a new research note out April 26.

Deutsche Bank now expect inflation (CPI) to top 9% year-on-year in April and October this year, "drastically hitting spending power".

Furthermore tax rises from April will eat further into household budgets and consumer confidence has already tanked to recessionary levels according to Raja.

UK recession risks have risen

Real wages are meanwhile forecast to shrink by 4% in 2022 in what amounts to one of the worst real term cuts to pay packets since the Second World War.

And business confidence is softening in the midst of rising cost pressures and falling operating margins.

Deutsche Bank's suite of "recession models" all point to one thing says Raja: "the probability of a recession is rising."

On average, Deutsche Bank's suite of recession trackers puts the odds of an economic downturn closer to a third over a one-year ahead timeline.

"The risk of a household recession may be even greater (household consumption shrinking), given the confluence of factors plaguing consumer spending," he adds.

Yet although recessionary risks are rising Deutsche Bank continue to think that the UK economy will avoid a technical recession at this stage.

"But more importantly, the risk of a recession is no longer a far off tail risk," Raja cautions.

This does not offer confidence in the UK macro economic outlook and has contributed to a rerating lower of expectations for future Bank of England interest rate rises.

This in turn has a mechanical pull on Pound exchange rates, helping to explain the currency's recent poor performance. (Set your FX rate alert here).