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GBP to USD Exchange Rate Begins Recovery as US Democratic Party Could Control Senate

January 6, 2021 - Written by James Fuller

After plunging at the beginning of the week, the British Pound to US Dollar (GBP/USD) exchange rate is making a recovery attempt today. Investors are buying the Pound again as the US Dollar is sold on higher market risk-sentiment. While coronavirus jitters are weighing on Sterling, the US Dollar is being sold today as investors react to speculation that there could be more government stimulus in the US depending on how US Senate elections in Georgia conclude.

Following last week’s fairly bullish movement, GBP/USD has seen more mixed movement this week. Since opening the week at the interbank level of 1.3676, GBP/USD has been trending with a largely downside bias.

However, since last night GBP/USD has been recovering Monday’s losses as the US Dollar weakens once again. At the time of writing, GBP/USD trends in the region of 1.3653.

This leaves GBP/USD quite close to Monday’s high of 1.3697 - which was the best GBP/USD level in two and a half years.

GBP Exchange Rates Attempt Recovery as Markets Digest UK Coronavirus Outlook

Concerns that Britain’s economy will continue to be hit hard by the coronavirus pandemic knocked the Pound lower at the beginning of the week.

Britain will be in another national lockdown for at least another month. Investors sold the Pound amid fears that the pandemic will be hurting Britain’s economy more than other major economies have been hurt.

However, the third lockdown was widely expected. As a result, while Sterling has been tumbling, it could have fallen further.

The Pound is recovering thanks to weakness in the US Dollar today. Sterling’s gains are limited by concerns about UK data though.

Today also saw the publication of Britain’s December services PMI report. Britain’s services sector is its most vital economic sector, so the PMI falling short of expectations did weigh on the Pound’s appeal a little.

On the other hand, rising business optimism has helped the Pound a little today. According to Tim Moore, Economics Director at IHS Markit which compiles the PMI report:

‘With a third national lockdown underway, service providers will be braced for a sustained period of subdued UK economic conditions and deferred client spending in the first quarter of this year. However, business optimism on a 12-month horizon was relatively upbeat in December and reached its highest level for almost six years, underpinned by hopes that a successful vaccine rollout will help to deliver a strong economic rebound in the second half of 2021.’

USD Exchange Rates Sold as Markets Bet Democrats Will Take the US Senate

While the US Democratic Party was unable to take control of the US Senate during the 2020 Presidential Election, a special runoff election in Georgia took place yesterday.

It had two Senate seats up for grabs, and the Democrat Party has already won one of them. If both seats go to the Democrats, the Party will win enough seats to get a majority vote in the Senate.

This would be key in delivering the policies of US President-Elect Joe Biden when he enters office later this month.

Rising expectations that the Senate will flip to blue have boosted market risk-sentiment. This is because a Democrat-controlled Senate is expected to be more likely to pass fiscal stimulus that would protect US jobs and boost economic activity amid the coronavirus pandemic.

According to Joshua Mahoney, Senior Market Analyst at IG:

‘The sharp rise in upside from FTSE banking stocks does highlight the feeling that the more expansive Biden will provide as much support as necessary to avoid major economic suffering, thus lowering the potential losses that come from job losses and defaults.

There are clear winners and losers here, with the US likely to provide significant demand for raw materials as Biden pushes for a huge expansion in green infrastructure projects.’

GBP/USD Exchange Rate Forecast: Could Best Levels Be in Sight?

At the beginning of the week, the Pound to US Dollar exchange touched its best levels in two and a half years. As GBP/USD recovers this week’s losses, those best levels are once again coming into view.

If the Pound to US Dollar exchange rate continues to recover and advances higher, the pair may strike new multi-year highs going forward.

However, the US Dollar’s reactions to a shift in US Senate power could be mixed.

If the US Democratic Party takes control of the Senate as markets are betting, it could boost hopes for more fiscal stimulus from the US government. This would boost market sentiment and weigh on the safe haven US Dollar.

On the other hand though, safe haven demand could rise instead if markets become uncertain over the possibility of more business and bank regulation under the Biden administration.

The Pound’s own movement is likely to be influenced by Britain’s domestic coronavirus outlook. Investors may become more willing to buy the Pound again if coronavirus panic softens at all.

Upcoming US data will be closely watched as well. Tonight’s Federal Reserve meeting minutes and tomorrow’s US trade balance data could also influence the Pound to US Dollar exchange rate.
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