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GBP to USD Exchange Rate Hits New January Worst as BoE Negative Rate Bets Rise

January 11, 2021 - Written by Tim Boyer

Concerns about surges of coronavirus infections in Britain, combined with rising speculation that the Bank of England (BoE) could introduce negative interest rates soon, have left the British Pound to US Dollar (GBP/USD) exchange rate tumbling today. A rebounding US Dollar has been able to more easily capitalise on the Pound’s losses. The US political situation is keeping the US Dollar more appealing, at least for now.

GBP/USD opened last week at the level of 1.3676, before briefly touching on a high of 1.3695, the best level for the pair in two and a half years.

After touching that high though, GBP/USD plummeted and spent the rest of the week trending lower. GBP/USD ultimately closed last week at the level of 1.3568.

Then, when markets opened this morning, GBP/USD tumbled once again. At the time of writing on Monday afternoon, GBP/USD is trending near lows of 1.3462 - the worst levels for the pair since the end of December.

This means GBP/USD has essentially shed all of January’s advances, despite Brexit deal relief and a weak US Dollar.

GBP Exchange Rates Unappealing on Rising Bets of Negative Interest Rates

Investors continued to find the Pound unappealing after markets opened today.

Rather than attempting recovery from last week’s losses, there was little perceived reason to start buying the British currency again.

Britain’s coronavirus infection rate remains near its highest levels despite a third national lockdown beginning next week.

With Britain’s coronavirus situation dire, markets are increasingly speculating that the Bank of England (BoE) will implement controversial negative interest rates in the coming months.

Speculation of negative interest rates has only continued in response to today’s comments from Bank of England policymaker Silvana Tenreyro:

‘Monetary policy transmission have worked effectively under
negative rates in other countries, with some of the evidence
pointing to more powerful effects’

In today’s online speech, she also said:

‘No clear evidence that negative rates have reduced bank profits overall, and a number of studies find positive impacts, once you take into account the boost to the economy.

Negative bank rate does not, therefore, imply that rates facing households and businesses will necessarily turn negative.’

Her discussions of negative rates were seen as the latest signal that the BoE was heavily anticipating implementing them soon.

USD Exchange Rates Rebounding on Stimulus Hopes despite Poor US Data

Last week saw the publication of a highly concerning US Non-Farm Payroll report. Despite this though, demand for the US Dollar surged this morning and the currency is currently rebounding against some major rivals.

This includes both the Pound and the US Dollar’s biggest rival the Euro (EUR).

Investors are buying the US Dollar back from its lows, due largely to expectations that the currency’s yields could rise depending on upcoming political action.

The incoming Joe Biden administration is expected to implement more fiscal stimulus for the US economy once it comes into power under two weeks from now.

These expectations are also boosting US Treasury yields.

According to Valeria Bednarik, Chief Analyst at FXStreet:

‘Following a terrible Nonfarm Payroll report, the market mood soured, yet at the same time, hopes for fresh stimulus rose. The Dollar finds support in government debt yields, with as Treasuries yields stand at levels last seen in March 2020, retreating modestly from the multi-month highs clinched last week.’

GBP/USD Exchange Rate Forecast: Pair May Continue to Tumble

Investors may be hesitant to start buying the Pound again without a notable boost in the UK outlook. This means that the Pound to US Dollar exchange rate could fall further in the coming days.

There is no notable UK data due until Friday. For now, the Pound will continue to be influenced by Britain’s coronavirus situation and any fresh comments from Bank of England (BoE) officials on negative interest rates.

Tomorrow morning will see a speech from BoE policymaker Broadbent. If he signals that negative rates are possible, the Pound will remain weak.

Of course, if Britain’s coronavirus situation remains gloomy the Pound will be even less likely to advance again.

What’s more, the US Dollar’s appeal could intensify if safe haven demand rises, or if markets continue to focus on potential US fiscal stimulus.

US data due tomorrow, including economic optimism and job openings stats, could influence the Pound to US Dollar exchange rate as well.
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