Pound US Dollar (GBP/USD) Exchange Rate Firms amid Risk-On Impulse

Pound US Dollar (GBP/USD) Exchange Rate Strengthens amid Modest Recovery in Global Risk Sentiment

The Pound US Dollar (GBP/USD) exchange rate is rallying today amid mounting geopolitical tensions simmering between the US and China.

At time of writing, the GBP/USD exchange rate is around $1.2177, a 0.28% climb from this morning’s opening levels.

US Dollar (USD) Loses Momentum amid Rising Geopolitical Tensions

The US Dollar is subdued today as a positive turn in the equity markets has eased global risk sentiment for the time being. However, mounting geopolitical tensions could see a return of safe-haven flows as US House of Representatives Nancy Pelosi arrives in Taiwan, much to the chagrin of China.

Becoming the most senior US official to visit Taiwan in over 25 years, Pelosi has irked officials in China, potentially damaging US-Sino relations. The Chinese Foreign Ministry published a statement condemning the visit, citing the arrival of Pelosi seriously violates the sovereignty and territorial integrity of China. Demonstrating their anger, Beijing warned of military drills and live-fire exercises in sea and air surrounding Taiwan.

Potentially weighing on the US Dollar further is the deteriorating near-term outlook for the ‘Greenback’. With a weakening economy and a labour market no longer showing the strength it did, expectations of further aggressive rate hikes by the Fed are waning.

Pound (GBP) Remains Firm amid Bold Rate Hike Expectations

The Pound (GBP) is enjoying moderate success against most of its peers today as the market awaits the Bank of England (BoE) interest rate decision tomorrow. Expectations of a 50bps rate hike, the largest since 1995, is buoying both investors and the Pound.

However, a myriad of headwinds loom on the horizon for Sterling. Final services PMI printed lower than expected, further highlighting the cost-of-living crisis. A downward revision to 52.6 from 53.3 for the month of July showed the slowest output growth in 17 months of expansion. Tim Moore, Economics Director at S&P Global said of the data:

‘UK service providers reported their worst month for business activity expansion since the national lockdown in February 2021. Reduced levels of discretionary consumer spending and efforts by businesses to contain expenses due to escalating inflation have combined to squeeze demand across the service economy.’

Elsewhere, the ongoing political uncertainty is keeping a lid on any significant gains as both Rishi Sunak and Liz Truss have drawn criticisms over their questionable tactics to pander to the ‘far right’. Sunak pledged to review the Equality Act, taking aim at ‘woke nonsense’, and Truss also continues to fuel a culture war. Many LGBTQ+ Tories believe their rights are being weaponised in a bid to win over the core Conservatives.

Pound US Dollar Exchange Rate Forecast: US PMI to Further Sink the US Dollar?

Looking ahead, the Pound US Dollar exchange rate could see further movement with the release of several key pieces of US data. PMI data for the services sector is due to highlight another slowdown, marking a fifth consecutive decline.

Elsewhere, political and social unrest will likely continue weighing on the Pound, as will the spiralling cost-of-living crisis. All eyes will be on the BoE interest rate decision tomorrow, and if the central bank falls short of the expected 50bps rate hike, Sterling could be under further pressure.

Danny Tingle

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