Pound US Dollar (GBP/USD) Exchange Rate Remains Rangebound amid Headwinds for Both Currencies

Pound US Dollar (GBP/USD) Exchange Rate Trades Sideways

(Updated 16:00, 18/10/21) The Pound US Dollar (GBP/USD) exchange rate has continued to trade sideways today as both currencies face headwinds, softening against their other rivals.

US industrial production printed well below expectations this afternoon, contracting by 1.3% versus the 0.2% growth expected. Global chip shortages hit the motor vehicle industry, while mining production suffered the ‘lingering effects of Hurricane Ida’. These poor results seem to have dented the US Dollar (USD).

Meanwhile, renewed energy concerns are weighing on the Pound as gas prices soar once again. Hopes of increased gas supplies from Russia, which calmed the market last week, are now fading.

In addition, some economists fear that an interest rate rise from the Bank of England (BoE) this year would be a policy error. A rate hike would not alleviate the supply-side causes of inflation, they argue, but instead would tighten conditions at an already-fragile time in the UK’s economic recovery.

With these factors weighing on both the Pound and the US Dollar, GBP/USD has remained rangebound this afternoon. It’s currently trading at about $1.3715, down just 0.05% from $1.3723 at the open of today’s session.

Original article continues below:

Pound US Dollar (GBP/USD) Exchange Rate Wavers on Cautious Trade and BoE Comments

The Pound US Dollar (GBP/USD) exchange rate is wavering in a narrow range today amid a lack of data and a risk-off mood.

Both currencies are supported by hawkish expectations of their respective central banks. Sterling in particular is boosted by comments from Bank of England (BoE) Governor Andrew Bailey over the weekend.

Pound (GBP) Eases off Highs amid Risk-Off Mood

The Pound (GBP) has eased off its one-month high against the US Dollar (USD) today, as a risk-off market mood supports the safe-haven USD over the riskier Pound.

The souring of market sentiment comes amid a slowdown in the Chinese economy. China’s GDP grew by 4.9% year-on-year in the third quarter of 2021, below consensus expectations of 5.2% and down from 7.9% in the second quarter.

The news has weighed on European markets this morning, driving down risk appetite. Richard Hunter, Head of Markets at interactive investor, commented:

‘The bullish start to the week implied by futures markets this morning hasn’t materialized, as growth and inflation fears resurface.

‘China’s assets have led the tumbled, after weaker than expected GDP, industrial production and fixed asset investment provided a sobering reminder of the middle kingdom’s precarious economic position’.

However, Sterling is putting up a resistance, thanks to the continued tailwind of BoE rate hike expectations.

On Sunday, BoE Governor Andrew Bailey once again indicated that a rate hike may be imminent. Bailey said:

‘Monetary policy cannot solve supply-side problems – but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations…

‘And that’s why we at the Bank of England have signalled, and this is another such signal, that we will have to act’.

These comments are buoying the Pound today and preventing a significant downside.

US Dollar (USD) Supported by Retail Sales Afterglow

Meanwhile, the US Dollar is catching bids thanks to the bearish market mood and the afterglow of Friday’s retail sales figures.

US domestic sales increased by 0.7% in September, smashing expectations of a 0.2% decline. The result followed the lowest number of weekly jobless claims since the pandemic began and better-than-expected results from US banks.

The ‘Greenback’ has managed to extend the subsequent rally into this week’s trade, with the positive US economic data increasing expectations that the Federal Reserve will tighten monetary policy soon.

GBP/USD Exchange Rate Forecast: Risk Appetite Could Tip the Balance

Looking ahead, the GBP/USD exchange rate could continue to waver this morning if risk appetite remains low. However, if the market mood starts to brighten then this could tip the balance in Sterling’s favour.

Industrial production figures from the US this afternoon could cause some movement. Output is expected to have slowed to 0.2% in September, which may dent USD if the full report indicates that supply chain issues dragged on growth.

As the week progresses, Sterling may struggle to extend its gains. Read our GBP/USD weekly forecast for more details.

Samuel Birnie

Contact Samuel Birnie