Pound US Dollar (GBP/USD) Exchange Rate Extends Downside as CO2 Shortage Spreads

Pound US Dollar (GBP/USD) Exchange Rate at One-Month Low amid UK Gas Crisis

(Updated 14:50, 22/9/21) The Pound US Dollar (GBP/USD) exchange rate has extended its downside during today’s session, despite a subdued US Dollar (USD), as the ongoing gas crisis continues to rattle GBP investors.

Energy secretary Kwasi Kwarteng attempted to reassure Britons that the government had a handle on the energy crisis, but problems persist and investors remain anxious.

Kwarteng said that he is ‘confident’ the UK will find other sources of carbon dioxide after signing a deal with CF Industries to subsidise CO2 production over the next three weeks.

However, the CO2 shortage is expected to spread into Europe, with European producers currently slashing production due to the rising cost of gas, undermining the likelihood of the UK finding a stable, affordable source of CO2.

Meanwhile, Kwarteng is yet to give details on how the UK government will protect households from rising prices and energy supplier bankruptcies. The energy secretary said he is ‘looking at all options’, while refusing to rule out a windfall tax on companies profiting from the crisis.

Original article continues below:

Pound US Dollar (GBP/USD) Exchange Rate Dips on Cost of CO2 Deal 

The Pound US Dollar (GBP/USD) exchange rate is falling today as GBP investors worry about the cost of the government’s deal to restart CO2 production. 

However, the US Dollar’s (USD) upside may be limited amid a slightly more bullish market mood, as fears of an imminent collapse at China’s Evergrande are allayed. 

Pound (GBP) Softens as CO2 Crunch Costs Taxpayers 

The Pound (GBP) is subdued today as a lack of UK data leaves Sterling vulnerable to domestic headlines, namely the cost of the UK’s carbon dioxide deal with CF Industries. 

The UK government intervened in the country’s gas crisis yesterday, striking a deal with the US-based multinational CF Industries to restart CO2 production amid warnings that the shortage of the gas would significantly disrupt the UK’s food industry. 

However, restarting production has come at a cost. Earlier this morning, environment secretary George Eustace told Sky News that the bill could run into the tens of millions. 

The emergency subsidy follows yesterday’s public sector borrowing data for August, which printed almost 25% higher than City economists had expected. Government borrowing was £20.5bn last month, £4.9bn above the forecast figure. 

While most commentators see the government intervention as essential, the increase in government spending may be making GBP investors uncomfortable today. In addition, the price of CO2 is expected to jump sharply, which could have knock-on effects for both producers and consumers. 

The UK gas crisis is expected to worsen as the months grow colder, presenting a rather bleak outlook for the third quarter of 2021. 

US Dollar (USD) Capped as Market Mood Improves 

The US Dollar (USD), meanwhile, is firming against the Pound, despite a slightly more upbeat market mood chipping away at demand for the safe-haven currency. 

The modest recovery in risk appetite comes as Evergrande, the debt-ridden Chinese property developer, has agreed a deal to meet some of its domestic debt, alleviating investors’ fears somewhat. 

The debt crisis has spooked markets in recent days, with investors fearing that a messy collapse could ripple out across global financial markets. But the news that the company is in a position to meet some of its interest payments seems to have lessened concerns. 

In addition, the Chinese central bank has injected ¥120bn ($19bn) into the banking system to strengthen financial markets, which has also soothed investors. 

With risk appetite growing, the appeal of the safer US Dollar is fading. This may be capping gains for the ‘Greenback’ against the Pound. 

Meanwhile, the Federal Reserve’s monetary policy decision this evening is hanging over today’s trade. This could be causing some hesitancy among USD investors, which may also be limiting the US Dollar’s upside and keeping the GBP/USD exchange rate in a relatively narrow range. 

GBP/USD Exchange Rate Forecast: Fed Decision in Focus 

With no UK data out today, the country’s energy crisis could continue to be a key factor in GBP exchange rates. As markets digest the government’s deal and its implications, Sterling could soften further. 

USD investors will be looking ahead to the Fed decision this evening. Most commentators seem to expect that the central bank will postpone a tapering announcement until November. If this is the case, the US Dollar might lose its upward momentum as tapering fears dissipate and risk appetite improves. 

However, with the UK’s situation looking bleak, GBP/USD could remain muted.