US Dollar to Pound Exchange Rate (USD GBP) Forecasted Higher on Reserve Currency Status

July 21, 2014 - Written by John Cameron

STORY LINK US Dollar to Pound Exchange Rate (USD GBP) Forecasted Higher on Reserve Currency Status

The US Dollar to Pound Exchange Rate (USD/GBP) forecasts see movement higher, Sterling to Australian & New Zealand Dollars predicted to strengthen - The weekend market shutdown brought a marked increase in the level of commentary warning of an immanent correction in the relative value of world stocks which could have a marked effect on movement in the global currency markets.

Christine Lagarde, Head of the International Monetary Fund, lead the chorus line, asserting that levels of optimism in the markets may be too high given the pronounced levels of joblessness in mainland Europe. She went on to state that historically high governmental indebtedness in the eurozone’s peripheral states, along with the potential for deflation in the region, meant that an adjustment in equities values and a shift out of risk could be immanent.

Today the global currency markets see the folloing levels:
- The pound to australian dollar exchange rate is -0.36 per cent lower at 1.81621.
- The pound to euro exchange rate is +0.39 per cent higher at 1.26720.
- The pound to dollar exchange rate is -0.03 per cent lower at 1.70631.

Lagarde observed in a speech in Paris late on Friday that, "confidence is improving and financial markets are upbeat, perhaps a little too upbeat. There is a danger of a vicious cycle - persistently high unemployment and high debt-to-GDP ratios jeopardize investment and lower future growth’.

Many analysts have observed during the weekend market close that the VIX ‘fear index’ has remained at constantly low levels for several months now, suggesting a dangerous amount of complacency amongst investors. A similar situation occurred for VIX early in 2007, preceding the global financial crisis which culminated in the collapse of Lehman Brothers in the Autumn of 2008, leading economists to suggest that the global economy could be slipping towards another pronounced shift out of risk in the near-term.

Geo-political events during the past 72 hrs have added to the impression that this may prove to be a fervently ‘risk-off’ trading week in the currency markets. The news which emerged at the end of last week that Israeli land forces were entering Gaza in an effort to quell Palestinian militants added to the grim picture of the current situation in the Middle East. The death toll following Israel’s recent rocket attacks passed 300 over the weekend, and with neither side showing any appetite for compromise, that total is likely to climb. Meanwhile, reports from security sources that gunmen had killed at least 15 soldiers at an Egyptian gunpoint added to the impression that the Middle East is sliding into turmoil.

However, the main focus of geo-political tension rests firmly on the Ukraine as this week’s session gets underway. Conventional wisdom now accepts that Thursday’s shooting down of a Malaysia Airline 777 passenger jet with the loss of all 298 people on board was caused by a stray missile fired by pro-Russian separatists. The weekend news that Moscow-backed fighters in the East of Ukraine were blocking attempts from crash investigators to reach the scene and allegations that Moscow had been implicit in providing training and equipment to the alleged perpetrators has caused outrage among Western leaders.

A continued shift out of risk-laden assets appears likely in the short term. In such an event, expect the Pound to Australian Dollar exchange rate (GBP/AUD) and the Pound Sterling to New Zealand Dollar (GBP/NZD) exchange rates to climb Northwards towards their recent peaks once more. Meanwhile, the US Dollar could hoover up some pronounced safe haven support as it re-establishes its reserve currency status.

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