Pound US Dollar (GBP/USD) Exchange Rate Extends 21-Month Low

Pound US Dollar (GBP/USD) Continues to Fall as ‘Greenback’ Hits 5-Year High

(Updated 17:00, 27/04/2022) The Pound US Dollar exchange rate weakened further still this afternoon, as a lack of UK data left GBP/USD to trade on ‘Greenback’ strength.

The US Dollar firmed to a 5-year high against a basket of rival currencies, supported by several mid-tier data releases: March’s wholesale inventories increased by 2.3% – more than expected – while retail inventories (ex autos) also increased, according to a preliminary estimate.

Given the ‘Greenback’s sustained uptrend, analysts note that USD is now in overbought territory, which could be the prologue to a potential technical correction.

The underlying bullish bias remains intact for now, however, as global growth concerns attract safe-haven support to the US Dollar.

Original article continues below:

GBP/USD Exchange Rate Weakens on Stronger US Dollar

The Pound US Dollar (GBP/USD) exchange rate has fallen to levels not seen since July 2020 as turbulent market dynamics draw support towards safe-haven currencies such as the US Dollar (USD).

At the time of writing, GBP/USD is trading at $1.2545, down 0.3% from today’s opening levels.

US Dollar (USD) Bolstered by Risk-Off Trading

The US Dollar is supported this morning by a number of factors, including a risk-off mood fuelled by geopolitical concerns. Russia yesterday accused Nato of starting a ‘proxy war’ by supplying missiles to Ukraine, warning that the Kremlin would not rule out nuclear conflict.

Also supporting the ‘Greenback’ against its peers is a resumption of upside pressure in US bond yields as well as persistent hawkish signalling from the Federal Reserve. According to analysts at ING bank:

‘The Fed’s tightening cycle is largely priced in, [and] we do not see divergence between market expectations and central bank communication…

With the Federal Reserve having largely endorsed the market’s hawkish pricing, any risk related to a material dovish re-pricing seems quite remote for the dollar.’

Aggressive monetary tightening measures are forecast in response to America’s sky-high inflation; the country’s consumer price index hit 7% in March on an annualised basis. This is almost four times the Fed’s goal of 2%, and the highest reading in four decades.

Economists at Wells Fargo consider: ‘Regardless of the exact magnitude, the May 3-4 FOMC meeting likely will send a clear signal from monetary policymakers…

The first 50 bps rate hike in over 20 years and the start of balance sheet runoff shows that the Federal Reserve means business in its fight against inflation.’

Pound (GBP) Slumps ahead of CBI Data

The Pound (GBP) has entered a consolidation phase against the US Dollar, as the pair has fallen more than 4% in the month of April.

Subduing Sterling sentiment are risk-off headwinds, as well as central bank policy divergence concerning the Bank of England (BoE)’s stance on inflation. The UK’s central bank is operating on a more cautious footing than the Fed, as upside inflation risks are tempered by slowing economic growth.

While the BoE’s rate hike trajectory is uncertain, however, it will likely take steps next week towards selling some of the £875bn of government bonds amassed between 2009 and 2021. No other big central bank has commenced a similar process of active sales.

‘We are venturing into new and uncertain territory,’ says Sanjay Raja, chief UK economist at Deutsche Bank; but the wider impact on growth and inflation is likely to be very small to begin with.

Mark Capleton, a bond strategist at the Bank of America, says ‘The softly, softly approach of the Bank, where quarter-point steps appear to be the modus operandi, appears rather timid’; NatWest Markets strategist Imogen Bachra concurs: ‘It doesn’t feel like they are in any rush to get this process started.’

Pound US Dollar Exchange Rate Forecast: Ukraine Conflict to Direct Movement?

Looking ahead, the conflict in Ukraine is likely to drive movement in the GBP/USD exchange rate.

While UK data from the Confederation of British Industry is set to disappoint, a turnaround in risk sentiment inspired by progress in Ukraine could uplift GBP exchange rates.

Meanwhile, a clutch of US data may buoy the ‘Greenback’ this afternoon. Wholesale inventories are expected to have risen by 0.9% in March, while the US’s goods trade deficit is forecast to reduce.

Olivia Evershed

Contact Olivia Evershed


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