GBP USD Exchange Rate Slides Following Scottish Referendum Proposal

The pound plummeted to a near two-week low – in the 1.21 mid-range – against the dollar on Wednesday after mounting concerns about decelerating economic growth and political risks were compounded by a proposed Scottish independence referendum. 

The surge in UK inflation to a 40-year high of 9.1% in May cast a cloud over the UK economy, with the Bank of England under pressure to tame prices through policy tightening – a precarious task they must attempt without further harming the economy. 

Fresh political risk surfaced on Tuesday when Scottish First Minister Nicola Sturgeon proposed a second independence referendum for October 2023 – a move that is opposed by British Prime Minister Boris Johnson and his Conservative Party. 

Dollar supported by safe-haven status

The safe-haven dollar was supported by an investor flight to safety on Wednesday amid the mounting risk of a recession. 

The US economy contracted at a 1.6% annual pace in the first quarter, the government’s final gross domestic product (GDP) appraisal revealed – and the reading for the second quarter isn’t looking much better. 

GDP – a measure of the size and health of the economy – posted its first contraction since the onset of the pandemic in early 2020. Before the final reading, the government registered the decline at 1.5%. 

Speaking on Wednesday, Cleveland Federal Reserve Bank President Loretta Mester said she will support a 75 basis points (bps) interest rate hike at the central bank’s next policy meeting in July, provided economic conditions don’t change. 

“If conditions were exactly the way they were today going into that meeting – if the meeting were today – I would be advocating for 75 (bps) because I haven’t seen the kind of numbers on the inflation side that I need to see in order to think that we can go back to a 50 (bps) increase,” Mester told CNBC. 

Speaking during a panel discussion on Wednesday during the European Central Bank’s annual policy forum, Fed Chair Jerome Powell said the US economy is in “strong shape” and the central bank can reduce inflation to 2%. 

“We hope that growth will remain positive,” Powell said during the discussion, before adding that personal and business finances also look solid, and “overall the US economy is well-positioned to withstand tighter monetary policy.” 

Looking ahead

The UK economy’s GDP reading for the first quarter is slated for release on Thursday. 

It’s a busier day in the US economic calendar, with several notable data sets pencilled in: core personal consumption expenditures price index, initial jobless claims, personal income, personal spending, and the Chicago purchasing managers’ index. 

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