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Pound US Dollar (GBP/USD) Exchange Rate Firms amid Risk-On Trade

September 23, 2021 - Written by John Cameron

GBP/USD Rallies amid Bullish Market Mood

The Pound US Dollar (GBP/USD) exchange rate has bounced off five-week lows today despite multiple headwinds buffeting the Pound.

The upside in GBP/USD is primarily driven by a pullback in the US Dollar (USD) as a risk-on market mood saps demand for the safe-haven ‘Greenback’.

Pound (GBP) Recovers despite Economic Headwinds

The Pound (GBP) has managed to recover from five-week lows against the ‘Greenback’ today, despite the UK’s ongoing gas crisis and worse-than-expected PMIs.

This morning, the both the manufacturing and services preliminary PMIs failed to meet market expectations, with the former dropping from 60.3 to 56.3 and the latter from 55 to 54.6. Both PMIs reported the slowest growth in seven months as supply chain disruption and labour shortages see the UK recovery losing steam.

Meanwhile, the UK’s energy crisis is worsening. Yesterday, two more energy firms – Avro Energy and Green – went bust, bringing the total to seven. An estimated 1.5 million UK customers now face being transferred to a new supplier, with it likely that they will be placed on higher tariffs.

The news comes as the government has said it will not bail out failing energy companies, despite agreeing a multi-million Pound subsidy for US firm CF Industries to restart CO2 production for three weeks.

The gas crisis is expected to get worse as we head into winter. However, there is some positive news on the energy front. Wind speeds in the UK are picking up again, generating more electricity for the grid.

Low wind speeds were one of the many factors contributing to the UK’s skyrocketing gas prices, so an increase in wind energy generation could take some upward pressure off gas prices and soothe GBP investors somewhat.

In addition, the current risk-on market mood that is denting USD demand is also supporting Sterling, as GBP is a moderately risk-sensitive currency.

US Dollar (USD) Subdued amid Risk-On Trade

The US Dollar (USD) is stumbling today as a more upbeat market mood saps demand for the safe-haven currency.

The increased appetite for risk comes following the Federal Reserve’s policy announcement last night. The Fed said it would taper ‘soon’, though gave no concrete date, and hinted at raising interest rates next year.

This initially boosted USD, but the 'Greenback’ suffered some profit-taking in the American session.

News that the Fed won’t be tapering this month may be playing a part in the risk-on market mood, as may the generally upbeat message from the Fed, with the central bank saying that the US economy continues to strengthen.

GBP/USD Exchange Rate Forecast: BoE Decision in Focus

Looking ahead, the Bank of England’s (BoE) latest policy decision could impact GBP as we head into the afternoon.

The BoE voted to keep interest rates and its quantitative easing (QE) programme unchanged. While the Monetary Policy Committee voted unanimously for the former, there was a two-seven split in the QE vote.

As markets digest the decision and more details are revealed about the bank’s forward guidance, GBP/USD could move further.

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