Pound US Dollar (GBP/USD) Exchange Rate Narrows on Geopolitical Anxiety
The Pound US Dollar (GBP/USD) exchange rate is narrowing this morning, as the US Dollar gains strength amid a cautious session.
At the time of writing, GBP/USD is trading around US$1.2095, showing little movement from the morning’s opening rates.
US Dollar (USD) Strengthens amid Increasing Geopolitical Tensions
The US Dollar (USD) is firming this morning, amid ratcheting geopolitical tensions. The Ukraine-Russia war is continuing to spark anxiety amongst investors, benefiting the safe-haven ‘Greenback’.
The anniversary of the conflict is approaching, with fresh fears over a renewed Russian ground offensive. Furthermore, during a speech yesterday, Russian President Vladimir Putin stated Russia would cease participating in the New Start nuclear arms treaty.
With recent economic data releases showing a more resilient economy than expected, pressure continues to mount on the Fed. Due to a tight labour market, resilient consumer spending and stick inflation, further tightening is expected.
With this in mind, US treasury yields are climbing, further underpinning the ‘Greenback’. However, trade is largely muted ahead of tonight’s Federal Open Market Committee (FOMC) meeting minutes.
Investors will likely scour the release for any hawkish hints, which could bring further strength to USD.
Pound (GBP) Underpinned by Rate Hike Bets
The Pound (GBP) is continuing to benefit from momentum gained due to yesterday’s PMI releases. With the private sector finally returning to growth, GBP investors have been cheered.
Due to the economic resilience displayed, investors have been pricing in hopes for further interest rate hikes.
Francesco Pesole, FX Strategist at ING, stated:
‘A big (and unexpected) jump from 48.5 into expansionary territory (53.0) in the composite gauge is favouring a re-rating of growth expectations in the UK, which is ultimately translating into rising bets on Bank of England tightening – the biggest driver of GBP performance of late.’
Beyond investor bets, analysts have begun to anticipate a 15bps increase in the BoE’s terminal rate. Expecting the BoE to pause at 4.55%, the expectation is that the bank will deliver two more hikes.
However, the Pound’s increasingly risk sensitive nature could be capping its gains. With the market mood downbeat, GBP could be struggling to gain ground against safer assets.
Pound US Dollar (GBP/USD) Exchange Rate Forecast: Core PCE Price Data to Boost USD?
Looking further ahead for the US Dollar, the core catalyst of movement is likely to be January’s core PCE price data. Releasing on Friday, the yearly gauge is forecast to increase to 4.4% from 4.3%. As the Federal Reserve’s preferred inflation gauge, this could spark further rate hike bets and strengthen USD.
For the Pound, speeches from Bank of England (BoE) policymakers are likely to be the focus. With Catherine Mann and Silvana Tenreyro scheduled to speak, GBP could fluctuate. With Mann being significantly more hawkish than Tenreyro, her speech could strengthen GBP if she reiterates her stance on rate hikes.