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Pound US Dollar Hits Three-Week High amid Upbeat Mood

October 15, 2021 - Written by John Cameron

Pound US Dollar (GBP/USD) Buoyed by Risk-On Trade

The Pound US Dollar exchange rate hit a three-week high earlier in Friday’s session as optimism over UK-EU talks on the Northern Ireland protocol and Bank of England (BoE) rate hike expectations support Sterling.

Meanwhile, the US Dollar has weakened at the end of the week due to increased market risk appetite weighing on the safe-haven currency and US Treasury yields retreating.

GBP/USD moved above $1.37, up over 0.3%, to trade at 1.3719 at the time of writing.

Pound (GBP) Strengthens amid UK-EU Talks Optimism

The Pound benefited from an upbeat mood on Friday surrounding UK-EU talks on the Northern Ireland protocol and expectations the BoE could raise interest rates before Christmas.

After the EU released its plans to reduce border checks on goods arriving in Northern Ireland, talks between the UK and EU begin in Brussels on later on Friday.

Under the EU’s proposals, customs paperwork would reduce by 50% and spot checks cut by about 80%.

Brexit Minister Lord Frost is meeting European Commission Vice-President Maros Šefčovič to discuss the Northern Ireland protocol.

Although optimism is high that progress can be made, the two sides appear to have some way to go to make an agreement.

A spokesperson for the UK government said:

“It is clear there is still a substantial gap between our two positions. Accordingly, there is much work to do.
“Both we and the EU now have proposals on the table.
“We need to discuss them intensively in the days to come to see if the gaps can be bridged and a solution found which delivers the significant change needed.”

While Šefčovič commented that the EU would “respect deals we have signed which became international law” and that he has “no mandate to renegotiate protocol”.

Meanwhile, investors continue to price in an interest rate hike from the BoE despite Monetary Policy Committee (MPC) member Silvana Tenreyro warning yesterday that raising interest rates to tackle a temporary rise in inflation would be ‘self-defeating’.

US Dollar (USD) Dented by Upbeat Market Trade

The US Dollar has dipped at the end of this week’s session as an improving market mood dented demand for the safe-haven currency.

Equity markets rallied towards the end of the week after US banks reported forecast beating third quarter results, boosting market risk appetite.

Rising commodity prices added to the equity market increases, as metals, oil and gas prices all rose.

Initial jobless claims falling more-than-expected below 300,000 for the first time since the start of the pandemic to 293,000 also contributed to risk-on trade.

At the same time, US Treasury yields retreated which in turn weighed on USD exchange rates.

Pound US Dollar Forecast: US Retail Sales to Drive USD Movement

The Pound US Dollar exchange rate may extend its gains at the end of the week as an upbeat market mood weighs on demand for the safe-haven ‘Greenback’.

US retail sales data released on Friday afternoon may also dent USD, as forecasts point to 0.2% contraction in September, down on August’s 0.7% growth.

October’s Michigan consumer sentiment index could weaken the US Dollar, with confidence expected to remain low, albeit slightly higher than September’s reading.

In the absence of notable UK data, the Pound looks likely to remain sensitive to developments in UK-EU talks, the threat of an energy crisis in the UK, and expectations of when the BoE may raise interest rates.

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