Pound US Dollar (GBP/USD) Exchange Rate Hits Fresh 37-Year Low on Renewed Russia Risks

Pound US Dollar (GBP/USD) Exchange Rate Slides on Russia-Ukraine Fears

The Pound US Dollar (GBP/USD) exchange rate dropped this morning following the news that Russia has announced a partial military mobilisation, thereby escalating the conflict in Ukraine.

At the time of writing, GBP/USD is trading at $1.1329, down from around $1.1372 at the start of today’s session.

Pound (GBP) Falls as Ukraine Conflict Escalates

The Pound (GBP) slumped this morning as markets responded to the announcement that Russia will partially mobilise its forces to fight in Ukraine.

In a national address, Russian President Vladimir Putin said the country would call up military reserves, arguing that Russia was facing threats from the collective west.

Putin also accused the west of ‘nuclear blackmail’, and issued an open threat:

‘Nuclear blackmail has also been used… statements from senior representatives of Nato countries about the possibility and permissibility of using weapons of mass destruction against Russia: nuclear weapons.

‘I would like to remind those who make such statements about Russia that our country also possesses various means of destruction…

‘This is not a bluff. And those who try to blackmail us with nuclear weapons should know that the weathervane can turn and point towards them.’

The news represents a significant escalation in the ongoing conflict and is seen as Russia’s response to Ukraine’s highly successful counteroffensive.

With partial mobilisation, the war is likely to last for longer, thereby causing more damage to European economies – including the UK. More worryingly, the conflict could escalate even further. Should the Kremlin choose to use nuclear weapons against Ukraine, the west will likely escalate its response to the invasion.

US Dollar (USD) Firms ahead of Fed Meeting

Not only are these fears weighing on the Pound, but they’re also rattling global markets. As a result, investors are flocking to the safe-haven US Dollar (USD).

In addition, the ‘Greenback’ could be strengthening ahead of this evening’s Federal Reserve meeting. Markets expect the Fed to raise rates by at least 75 basis points, and after the Swedish central bank’s surprise 100-bp rate rise yesterday, traders are pricing in a higher probability of a full percentage point hike.

That said, USD investors may show a little hesitancy ahead of the rate decision. Rather than placing aggressive bets, some traders may instead prefer to wait on the sidelines until after the decision.

GBP/USD Exchange Rate Forecast: Fed Rate Decision in Focus

The Fed meeting later is likely to cause significant movement. If the US central bank raises rates by 0.75%, as broadly expected, USD could suffer some profit-taking. Markets have been pricing in a 75-bp hike for a while, so they may choose to cash in on USD’s strength after the hike takes place.

However, if the Fed opts for a full percentage point rise then the ‘Greenback’ could climb even higher against a weakened Pound.

Speaking of the Pound, domestic news and headlines around Russia will likely drive Sterling movement today.

The UK government has recently announced an energy price cap for businesses to help shield them from unaffordable energy costs. This could help to limit Sterling’s losses.

Samuel Birnie

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