Pound US Dollar (GBP/USD) Exchange Rate Recovers as UK Bond Market Stabilises
(Updated 16:30, 29/9/22) The Pound US Dollar (GBP/USD) staged a strong recovery through Thursday’s session, reversing an initial dip, as UK bond markets stabilised following the Bank of Engand’s (BoE) market intervention on Wednesday.
The BoE announced an emergency bond-buying programme in order to staunch the sell-off in UK government bonds, which had pushed pension funds to the brink of insolvency.
Despite volatility following the announcement, bond markets did eventually stabilise. This, in turn, gave Pound Sterling (GBP) a strong boost.
Meanwhile, a pullback in the US Dollar (USD) also contributed to GBP/USD’s gains. The downside in the safe-haven Dollar came despite widespread risk aversion.
At the time of writing, GBP/USD is trading at $1.1033, up almost 1.9% on the day. However, it still remains almost 1.9% lower than it was before Friday’s crash.
Original article continues below:
Pound US Dollar (GBP/USD) Exchange Rate Down amid Risk-Off Mood and UK Fears
The Pound US Dollar (GBP/USD) exchange rate is on the defensive again today as government bond yields rise once more, after falling briefly yesterday following the Bank of England’s (BoE) intervention.
At the time of writing, GBP/USD is trading at around $1.0792, down over 0.3% from an overnight high of $1.0836.
Pound (GBP) Stumbles as Worries Return
The Pound (GBP) has pared yesterday’s gains today as the initial impact of the BoE’s bond market intervention begins to peter out.
Since Chancellor Kwasi Kwarteng rocked markets with his ‘mini-budget’ last Friday, UK gilts have seen a sharp sell-off. On Wednesday, the BoE announced emergency plans to buy long-dated government bonds in an attempt to stabilise markets. The move came as pension funds – which were forced to start selling off collapsing bonds – were rushing towards insolvency.
On the @bankofengland intervention:
Am told the BoE were responding to a “run dynamic” on pension funds – a wholesale equivalent of the run which destroyed Northern Rock.
Had they not intervened, there would have been mass insolvencies of pension funds by THIS AFTERNOON.
— Ed Conway (@EdConwaySky) September 28, 2022
The move initially calmed bond markets, with government gilt yields dropping sharply. However, today yields are rising once again, causing renewed concern in UK markets and putting fresh pressure on the Pound.
Prime Minister Liz Truss has been doing radio interview rounds this morning, defending her economic plans. However, she has failed to soothe markets.
As Liz Truss was speaking the yield on the U.K. 10-year gilt rose as much as 21 basis points to 4.22% undoing some of the rally the Bank of England provided yesterday by its action pic.twitter.com/uRy8tuaIrQ
— Kitty Donaldson (@kitty_donaldson) September 29, 2022
US Dollar (USD) Firms as Market Mood Sours
Meanwhile, the US Dollar (USD) is gaining ground today, recouping some of yesterday’s losses.
Anxiety about the UK’s economic situation has added to global concerns in recent days. International investors fear that a full-blown financial crisis in the UK could compound existing global pressures, such as surging interest rates, high inflation, and the ongoing economic warfare between the West and Russia.
Yesterday’s bond market intervention helped cheer investors somewhat, but that optimism is fading fast.
As a result, today’s downbeat market mood is prompting traders to flock to the US Dollar, which is seen as a safe investment in times of uncertainty.
GBP/USD Exchange Rate Forecast: Sterling to Remain Weak?
BoE policymaker Dave Ramsden is due to speak at lunchtime today. He’s scheduled to talk about ‘real time data’, so he may not wade into the recent slump in Sterling or havoc in the bond markets. However, if he does touch on the current turbulence in the UK then it could perhaps prompt some movement.
In any case, the UK market remains febrile. We could see more volatility in the Pound today, and – unless there is a huge intervention or change of tack from the government or the BoE – GBP/USD will likely remain historically weak.
As for the US Dollar, the final US GDP growth rate reading this afternoon may affect the ‘Greenback’. If GDP growth for the second quarter of 2022 prints above or below previous readings, it could support or undermine USD, respectively.
In the afternoon and through into the evening we have speeches from four Federal Reserve officials. If the central bank policymakers maintain their hawkish tone, USD could climb.