Pound US Dollar (GBP/USD) Exchange Rate Falls amid Risk-Off Mood
(Update 17:00 17/12/2021) The Pound US Dollar exchange rate slid at the end of this week’s European session, weakening around 0.4% to trade at $1.3265.
Risk-off trade swept markets and provided a boost to safe-haven demand for the US Dollar.
Meanwhile, fears over the Omicron variant continued to weigh on the Pound, with Prime Minister Boris Johnson saying the UK is facing a ‘considerable wave’ of the new variant.
According to UK government figures, daily Covid-19 cases hit another record high for a third day in the UK of 93,045, up from 88,376 yesterday.
In addition, a study by Imperial College London has found the Omicron variant has a 5.4 times increased risk of reinfection than the Delta variant.
Pound US Dollar (GBP/USD) Exchange Rate Lacks Direction after Upbeat UK Retail Sales
The Pound US Dollar (GBP/USD) exchange rate is trading in a narrow range this morning after surging yesterday following the Bank of England’s (BoE) decision to raise interest rates.
Better-than-expected UK retail sales have also supported Sterling this morning, as GBP/USD trades a cent higher from the start of the week at $1.3328 at the time of writing.
Pound (GBP) Struggles after BoE Gains
The Pound (GBP) is holding most of Thursday’s gains today after the BoE surprised markets by raising interest rates to 0.25% from 0.1%.
Amid soaring Covid-19 cases in the UK and Omicron uncertainty, the central bank’s monetary policy committee (MPC) voted to raise rates by 8-1, citing soaring UK inflation, a strong UK labour market, and the threat of more Omicron-induced inflationary pressure as key reasons to hike rates.
Meanwhile, better-than-expected UK retail sales data for November has added support to GBP exchange rates this morning.
Retail sales rose 1.4% last month, above forecasts of 0.8% and up from October’s 1.1% reading.
The Office for National Statistics (ONS) deputy director for surveys and economic indicators, Heather Bovill, commented:
“Retail sales picked up in November, boosted by strong Black Friday and pre-Christmas trading.
“Clothing stores fared particularly well and have exceeded their pre-pandemic level for the first time. Computer, toy and jewellery retailers also reported robust sales this month.”
However, the impact of the upbeat retail data appears limited as Omicron concerns and signs of declining consumer confidence weigh on Sterling sentiment.
An unexpected drop in the UK’s services PMI for December highlighted the effect Omicron fears are having on the hospitality and travel sectors in particular, fuelling uncertainty over UK economic growth amid the threat of tighter restrictions going into the new year.
US Dollar (USD) Rangebound Following Central Bank Decisions
The US Dollar (USD) is struggling for direction today as the currency’s negative correlation with the Euro limits the ‘Greenback’.
The more hawkish tilt from the European Central Bank (ECB) at its December monetary policy announcement supported EUR exchange rates which weighed on the US Dollar.
USD exchange rates have continued to come under pressure since the Federal Reserve met market expectations of accelerating tapering its bond-buying programme, but Fed chair Jerome Powell disappointed investors by saying it would ‘not be appropriate to raise rates’ while the central bank winds down its support.
Although less influential than the ISM PMIs, the US Dollar came under some additional pressure from the Markit manufacturing and services PMIs for December missed forecasts and indicated a slowdown in private sector activity.
Pound US Dollar Forecast: Omicron Concerns to Drive GBP/USD?
Pound US Dollar exchange rate gains may remain limited in the coming sessions as UK Covid-19 cases hit record highs.
With soaring coronavirus infections threatening to lead to tighter restrictions in the UK, the Pound may struggle for support due to risk of disruption to economic activity.
However, the UK’s booster vaccination programme may provide Sterling support as the government aims to give a third vaccine dose to one million people per day.
Meanwhile, the US Dollar looks set to remain sensitive to market risk appetite as Omicron concerns drive market sentiment.
After making gains on expectations for the Federal Reserve to tighten monetary policy faster than other major central banks, the US Dollar looks set to lose that support after more hawkish stances from the ECB and BoE.