Lower Volatility in Equity Markets Has Boosted the Pound to US Dollar Exchange Rate
Last week saw the Pound to US Dollar (GBP/USD) exchange rate plunge, as markets experienced a brief surge in volatility leaving ‘safe haven’ investments like the US Dollar (USD) much more appealing.
Throughout the week, GBP/USD lost almost three cents and the pair trended near its lowest levels in three weeks when markets opened on Monday morning.
However, as markets calmed on Friday evening and volatility continued to fall on Monday, the Pound to US Dollar (GBP/USD) exchange rate has begun to recover from its worst levels.
So why did the US Dollar see a recovery rally last week, following over a month of poor performance? It’s largely due the latest developments in stock markets.
After a long period of rallies, equity markets saw a surge in volatility last week with some major global stock indexes such as the Dow Jones Industrial Average seeing significant losses.
As stocks fell, markets looked towards ‘safe haven’ investments, leaving the US Dollar much more appealing.
Pound (GBP) Exchange Rate Strength Weighed by Brexit Warnings
The Bank of England (BoE) indicated last week that it may need to up the pace of hiking UK interest rates, but due to persistent concerns about Britain’s economy amid the Brexit process the news had only a limited effect on Pound (GBP) strength.
While it had essentially been priced into Sterling in recent months, EU chief negotiator Michel Barnier stated on Friday that a Brexit transition period was not necessarily a given.
The Pound quickly gave up any of its Bank of England-related gains on Friday when Barnier expressed concern about some of the objections the UK government had made to the EU’s transition period offer.
Barnier has stated that some points of the offer were non-negotiable.
As a result, concerns grew that the UK and EU may not be able to agree to a transition period after all – or at least that uncertainty surrounding the success of Brexit negotiations had worsened.
The Pound was also weakened on Friday by some underwhelming UK industrial production and trade deficit stats, which fell short of expectations.
Pound to US Dollar (GBP/USD) Forecast: Inflation Data due This Week
The Pound to US Dollar (GBP/USD) exchange rate may struggle to recover much unless market demand for the US Dollar weakens again, as Sterling continues to be pressured by persistent Brexit uncertainties.
While Tuesday will see the publication of Britain’s January Consumer Price Index (CPI) report, the Bank of England (BoE) has already predicted that UK inflation will remain strong so the print is unlikely to inspire a significant boost in Pound demand.
On the other hand, Wednesday’s US data could prove influential. US inflation and retail sales stats from January will be published and if they impress the US Dollar could strengthen.
On the other hand, if US inflation comes in much lower than expected it could weigh on Federal Reserve interest rate hike bets and GBP/USD could recover.
Developments in equity markets could continue to inspire GBP/USD trade too. If stock market uncertainties continue investors will likely remain hungry for ‘safe havens’ and the US Dollar would strengthen.