Pound US Dollar (GBP/USD) Exchange Rate Wavers Lower amid Gloomy Market Mood
(Updated 15:55, 7/4/22) The Pound US Dollar (GBP/USD) exchange rate fluctuated a little today as volatility continues to ripple through markets. Overall, however, GBP/USD lost ground.
The downside in the Pound (GBP) came amid a bearish tone in global markets. Covid outbreaks in China, new sanctions targeting Russia, and warnings of recession risks in the UK and the US all conspired to create a risk-averse environment. This weighed on the risk-sensitive Pound while boosting the safe-haven US Dollar (USD).
At the time of writing, GBP/USD is trading at $1.306, after briefly touching a high of $1.31 at the start of the European session.
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Pound US Dollar (GBP/USD) Exchange Rate Choppy amid Market Volatility
The Pound US Dollar (GBP/USD) exchange rate got off to a turbulent start this morning, spiking as the European session began before reversing the movement.
The volatility comes as markets remain choppy. Risk sentiment continues to shift amid warnings of potential UK and US recessions, while geopolitical tensions and sanctions add to the uncertainty.
US Dollar (USD) Rises Unsteadily as Volatility Remains
Sentiment around the US Dollar (USD) has been mixed recently as warnings of a US recession complicate the upside from a more hawkish Federal Reserve.
Since the Fed’s last meeting, policymakers at the US central bank have been signalling their support for an aggressive pace of tightening to tackle surging inflation. This hawkish rhetoric has tended to underpin the ‘Greenback’.
However, economists are growing more concerned that the Fed could slam on the brakes too hard, triggering a recession in the US. Recent inversions in the US yield curve are also setting off alarm bells, as such activity is often an early indicator of an impending recession.
With this as the backdrop, last night’s hawkish meeting minutes from the Federal Open Market Committee (FOMC) had a muted effect on the US Dollar. The minutes confirmed that Fed officials were prepared to hike the fed funds rate by 50 bps. Policymakers also agreed to begin reducing the central bank’s balance sheet by $95 billion a month, likely from May.
Following the publication of the minutes, GBP/USD dropped, bounced back and then ticked higher overnight, despite a risk-off market mood.
This unsteady movement in the US Dollar has continued into today’s European session. However, at the time of writing, the safe-haven ‘Greenback’ is pressing its advantage, with the risk-off mood and hawkish Fed expectations lifting it across the board.
Pound (GBP) Slips despite Showing Resilience
Meanwhile, the Pound (GBP) is showing resilience today, having regained the week’s losses against most of its rivals. The risk-sensitive currency managed to climb yesterday and rally overnight, despite a downbeat market mood and concerns about the UK economy.
One factor that could be supporting GBP is the Bank of England’s (BoE) approach to monetary policy. The BoE has already enacted three rate hikes, bringing its Bank Rate back to the pre-pandemic level of 0.75%.
Since then, the bank has signalled it could slow its pace of tightening. This news hurt GBP in the past, as investors were hoping for an aggressive tightening cycle. However, markets may now feel that easing off the brakes is the appropriate course of action. Besides, even if the BoE stops raising rates, it is still ahead of many of its global counterparts.
Economists at investment bank UBS this week endorsed the Pound. They believe it will strengthen in the coming months because the BoE is one of the central banks that ‘are in the vanguard of the tightening cycle.’
That said, Sterling’s resilience has failed to prevent its downside against a strengthening US Dollar, as serious headwinds remain for GBP.
The UK’s cost-of-living squeeze has tightened over the past week, with soaring energy bills and higher taxes hitting households. Yesterday, Deutsche Bank warned that the income crunch is raising the risk of a UK recession.
GBP/USD Exchange Rate Forecast: Volatility to Continue?
Movement in GBP/USD could be hard to predict today. The instability around the ‘Greenback’ in recent days means we could see it pull back again and GBP/USD could waver. Equally likely, the headwinds facing Sterling could keep it under pressure and the US Dollar may continue to climb.
The factors affecting the Pound are predominantly the cost-of-living crisis and the Ukraine war. Any deterioration in either of these will likely weigh on GBP.
As for USD, the latest initial jobless claims data could provide some support. Economists expect unemployment benefits claims to remain low.
Some speeches from Fed officials could also cause some movement. But, considering the mixed sentiment around the Fed’s approach to monetary policy, the response could be limited.