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GBP to USD Exchange Rate Struggles to Sustain Recovery as Investors Look to Safe Havens

December 22, 2020 - Written by John Cameron

Despite reports of a new strain of the coronavirus in Britain, the British Pound to US Dollar (GBP/USD) exchange rate has been recovering from its worst levels on a combination of Brexit hopes and UK data today. However, the US Dollar’s own fortunes are reversing after weeks of poor performance, as markets start to look for safer investments due to this latest coronavirus panic.

Since opening this week at the level of 1.3521, GBP/USD has been trending with a downside bias.

Yesterday, GBP/USD touched on a low of 1.3193 - not too far from the pair’s worst levels all month. However, since last night GBP/USD has been rebounding higher.

At the time of writing, GBP/USD trends near the level of 1.3390. The pair is still well below the week’s opening levels due to the US Dollar’s resilience amid higher safe haven demand.

GBP/USD has been able to sustain most of last week’s gains though, as the Pound continues to be buoyed by Brexit deal hopes. GBP/USD is also less than three cents away from last week’s high of 1.3621, which was the best level for the pair in over a year.

GBP Exchange Rates Buoyed by Hopes for Brexit Deal despite Coronavirus Jitters

Since last night, the Pound has been rebounding from its worst levels. This came as markets calmed from the day’s coronavirus panic.

It is currently expected that existing coronavirus vaccines, still rolling out, will affect this new more infectious strain that has been reported in Britain. This is keeping markets from becoming too panicked.

What’s more, markets still generally expect a UK-EU Brexit deal will be reached, even with time running out.

Today, the EU rejected a UK concession on fisheries. There is speculation that the UK position could further soften soon, and a deal is expected to be reached soon.

Expectations that a deal could boost the Pound outlook are keeping the Pound buoyant. According to Jane Foley, Head of FX Strategy at Rabobank:

‘While a Brexit deal would be a huge move forward, any relief rally in the Pound is likely to be tempered by the reality that many sectors will remain outside the reach of any deal and by the concerns over the impact on the economy of the current tier 4 restrictions and border closures,’

Today’s UK growth rate report from Q3 also beat expectations, but the Pound’s resilience against an advancing US Dollar was limited.

USD Exchange Rates Benefit from Safe Haven Demand amid Fresh Coronavirus Fears

The US Dollar is a safe haven currency, which often benefits in times of global market uncertainty.

As a result, it has been more appealing this week as reports of a more contagious variation of the coronavirus Covid19 shock markets.

Fears that this more infectious strain could hit the global economy made markets panic, sending investors looking for safer assets. The US Dollar has been more appealing this week as a result.

There are rising expectations that rival economies like the UK and Eurozone may be pressured to take more drastic action with more lockdowns. Some analysts believe this could keep the US Dollar more appealing as well.

According to Marios Hadjikyriacos, Analyst at XM:

‘If the Eurozone and Britain are forced to play the rolling shutdown game until the vaccines are fully deployed, then the popular narrative for a weaker dollar into 2021 may come under heavy fire as America heals its economic wounds faster,’

Today’s US growth rate stats also beat forecasts, which further boosted demand for the US Dollar.

GBP/USD Exchange Rate Forecast: Safe Haven Demand Could Keep USD Gaining

The safe haven US Dollar could keep advancing in the coming sessions, depending on how panicked markets become on coronavirus and Brexit developments.

If the new more infectious coronavirus strain is detected outside Britain, fears of more lockdowns across the globe could rise. This could weigh on economic recovery hopes and boost safe haven demand.

This would weigh on the Pound and boost the US Dollar. Of course, if Brexit concerns worsen, this would also weigh on the Pound.

A UK-EU Brexit deal is still expected. If the UK and EU are able to reach a deal soon, some of the Pound’s downside risks would soften and Sterling could strengthen.

However, the safe haven demand could keep the US Dollar appealing. What’s more, a no-deal outcome could mean huge Pound losses.

Tomorrow will see the publication of US PCE inflation data and durable goods stats. Overall though, coronavirus and Brexit developments will remain the biggest focus for the Pound to US Dollar exchange rate.
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