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GBP/USD: Pound-to-Dollar Exchange Rate Hits 2 and a Half Year Best Ahead of Joe Biden Inauguration

January 20, 2021 - Written by James Fuller

Despite anticipation for a better outlook for the US economy under the upcoming Joe Biden administration, the British Pound to US Dollar (GBP/USD) exchange rate has still been advancing today. Investors bought the Pound in reaction to this morning’s better than expected UK inflation data, combined with hopes that Britain’s coronavirus outlook will improve as vaccines continue to be rolled out. Any surprising developments in US politics could cause a rise in US Dollar demand however.

Since opening this week at the level of 1.3583, GBP/USD has been trending with a largely upside bias. Monday’s dip was short-lived, and GBP/USD has since surged to new highs.

Just earlier, GBP/USD touched on a high of 1.3709. This was the best level for GBP/USD in over two and a half years, since mid-2018.

GBP/USD has since slipped back from that best level, but at the time of writing on Wednesday is still trending well above the week’s opening levels in the region of 1.3679.

GBP Exchange Rates Bounce as Markets Surprised at UK Inflation Report

The Pound’s rally briefly accelerated this morning, as markets reacted to the latest UK ecostats.

This morning saw the publication of Britain’s December Consumer Price Index (CPI) inflation rate report. The key inflation rates all beat expectations, coming in at 0.3% month on month and 0.6% year on year.

It came as a surprise to investors. Some analysts reacted to the news by speculating that Britain could see a surge in inflation as it recovers from the coronavirus pandemic later this year.

According to Tom Stevenson, Investment Director for Personal Investing at Fidelity International:

‘The doubling in the CPI measure of inflation in December to 0.6% is a reminder of the need to remain vigilant about the price threat. Inflation never seems to be a problem until suddenly it requires firm action to tame it again. The combination of unprecedented government spending, pent up consumer demand and low productivity is a recipe for rising prices. Transport, recreation and clothing were the biggest contributors.

The challenge facing UK policy makers is that historically high debt levels will make it hard for us to rein in inflation with higher interest rates as and when they become necessary. Servicing our high borrowings is expensive enough with rates on the floor.’

Sterling was unable to keep climbing higher though. Market caution ahead of the afternoon’s US political events kept markets from making moves that were too sharp, so GBP/USD slipped back from its best levels.

USD Exchange Rates Unappealing as Markets Optimistic Ahead of Biden Inauguration

The US Dollar is a safe haven currency. As a result, it has actually been weakening despite the market’s higher optimism around the US outlook lately.

Markets expect that the incoming Joe Biden administration will ramp up fiscal spending, with a big spending package reportedly planned. This, combined with stricter stances on the coronavirus pandemic, could help the US economy to recover.

For now, optimism around the Biden administration is boosting market sentiment, which is limiting demand for the safe haven US Dollar.

According to Yohay Elam, Analyst at FXStreet:

‘The focus is on what Biden does in his first hours and days at the White House. A call to wear face masks and a boost to America's vaccination campaign would be welcomed while trying to force states to shutter would weigh on markets.’

This is also overshadowing jitters ahead of Biden’s inauguration, due to be held later today.

It is still possible that the inauguration could see the kinds of civil unrest that spooked markets at the beginning of the month, when a riot of white supremacist groups stormed the US Capitol in attempt to overthrow the election result.

GBP/USD Exchange Rate Forecast: Biden Inauguration in Focus

With Britain’s economic outlook fairly quiet until the end of the week, the Pound to US Dollar exchange rate’s movement could be driven more by shifts in market sentiment and the US Dollar for the time being.

For now, all eyes are on the US ahead of Joe Biden’s inauguration as the 46th President of the United States.

If the inauguration goes smoothly, markets are likely to calm further and attention will turn towards the administration’s potential to more seriously tackle the coronavirus pandemic and ramp up fiscal spending.

On the other hand, if there is fresh civil unrest it could cause some market panic. Depending on potential severity, markets could buy the safe haven US Dollar if it has a negative impact on confidence.

Without this though, there might not be much reason to buy the safe haven US Dollar as higher market sentiment would continue to boost the comparatively risky Pound.

Looking ahead, Pound investors will be focused on Britain’s coronavirus situation.

Any surprises from Friday’s UK retail and PMI stats could also influence the Pound to US Dollar exchange rate.
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