The Pound US Dollar (GBP/USD) exchange rate has started today slipping back to near one-year lows that the pairing hit last week following Omicron-driven volatility and tighter coronavirus restrictions in the UK.
Alongside a slew of high-impact economic data releases, the Bank of England (BoE) and Federal Reserve monetary policy decisions this week look set to drive significant movement in GBP/USD.
What’s Been Happening: GBP/USD Slides to One-Year Low
The Pound (GBP) tumbled to a one-year low against the US Dollar (USD) last week after the announcement of tighter Covid-19 restrictions in England increased concerns over the potential economic impact the Omicron variant.
Shifting expectations for a rate hike from the BoE caused fluctuations in Sterling, with Deputy Governor Ben Broadbent warning inflation will rise above 5% by spring 2022 appearing to increase bets while Omicron-related fears weakened the prospect.
GBP exchange rates then finished the week with limited upside after UK GDP for October missed forecast to show stalling growth of 0.1%.
Meanwhile, after starting the week firmly on Fed rate hike bets, the US Dollar came under pressure amid a risk-on mood that sapped safe-haven demand for USD as fears eased over the severity of the Omicron variant.
The US Dollar suffered further losses on improving market sentiment after Pfizer/BioNTech claimed a third Covid vaccine neutralises the new variant.
A risk-off mood allowed the ‘Greenback’ to later recover ground before US inflation meeting expectations of 6.8% limited gains.
Three Things to Watch Out for This Week
- Federal Reserve Interest Rate Decision
With expectations for the Federal Reserve to accelerate tightening its bond-buying programme to pave the way for rate hikes in 2022, the US Dollar may receive significant support following the Fed’s announcement.
- Bank of England Interest Rate Decision
The likelihood for the BoE to raise interest rates in December has declined significantly amid concerns over the Omicron variant disrupting UK economic activity, potentially weighing on GBP. However, hints at higher rates early next year may provide the Pound support.
- UK Data
Several high-impact UK data releases this week will likely drive significant movement in Sterling, with investors looking to employment data, inflation, services and manufacturing PMIs, and retail sales to provide evidence of the UK’s economic recovery.
Pound US Dollar Exchange Rate Forecast
The Pound US Dollar exchange rate may struggle to move away from one-year lows this week as the BoE and Federal Reserve’s perceived diverging policy gap may weigh on GBP/USD.