Pound US Dollar (GBP/USD) Exchange Rate Soars as Risk-On Market Mood Sinks Greenback

January 4, 2023 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Soars as Risk-On Market Mood Sinks Greenback

Pound US Dollar (GBP/USD) Exchange Rate Rallies as Risk-On Trade Wounds USD

The Pound US Dollar (GBP/USD) exchange rate soared on Wednesday, as healthy risk appetite across the session saw the safe-haven US Dollar weaken against most major peers.

At the time of writing, GBP/USD traded at around US$1.2055, an increase of roughly 0.7% from Wednesday’s opening rates, and a recovery from Tuesday’s sharp losses.

US Dollar (USD) Sinks as Market Mood Improves

Wednesday saw the US Dollar (USD) lose most of it’s early-week gains, as the market mood shifted back to risk-appetite.

As a safe-haven currency, the ‘Greenback’ is particularly susceptible to upbeat market moods, with a fall in US treasury bond yields exerting further pressure on USD. As such, the US Dollar is enduring a period of sell-off ahead of Wednesday’s key data releases.

However, with the latest ISM manufacturing PMI forecast to show the sector remaining in contractionary territory, the Greenback may see further losses through the session if this prints as forecast.

Pound (GBP) Curtailed by Downbeat Domestic News

The Pound (GBP) struggled for support on Wednesday, as a lack of key data releases prompted investors to examine domestic headlines.

The consumer credit data from the Bank of England (BoE) showed an increase in borrowing from UK households in November due to the cost-of-living crisis, with an additional £1.2bn of credit card borrowing being taken, far above October’s £700mn.

Furthermore, mortgage approvals for house purchases decreased, reflecting the UK’s suffering housing market. As such, investor anxieties over the UK’s recession are spiking, prompting a lack of support beyond risk-flows.

Anthony Codlling, a Housing Analyst, examined the fall in mortgage approvals. He stated: ‘This was a big drop. Mortgage approvals fell by 11,800 in November, the biggest fall since April 2020 and are at their lowest level since June 2020. This is not the news the housing market was hoping for in the first week of the new year.’

Further weighing on the Pound on Wednesday was another increase in food inflation. The British Retail Consortium (BRC) found that December saw food inflation hitting another record level of 13.3% annually, with fresh produce inflation hitting 15%.

Elsewhere, industrial action added further headwinds to the Pound, potentially limiting risk-based gains. Union leaders have begun to speak about coordinated strike action, leading to further concerns for GBP investors over the impact this will have over the economy.

Pound US Dollar (GBP/USD) Exchange Rate Forecast: Spotlight on the FOMC Minutes

The key presser for the US Dollar (USD) will be the release of the meeting minutes from December’s Federal Reserve policy meeting. These minutes are likely to be picked over by analysts searching for further indications of the Fed’s attitude to tightening.

Should they reassert the Fed’s commitment to either high rate hikes, or a higher terminal rate as previously iterated, the ‘Greenback’ may strengthen as investors flock to make bets on either scenario. However, if they point to a split across the Fed, the US Dollar may weaken.

Meanwhile, Wednesday afternoon brings the latest ISM manufacturing PMI for the US. With a contraction forecast for December, if this prints as expected it may weigh on the US Dollar.

For the Pound, domestic headlines may be the core driver of movement through the remainder of the week. With little in the way of substantial macroeconomic data, investors may focus on the continuing cost-of-living crisis and industrial action. Any further headlines on these topics may weaken the Pound, pending further improvements in negotiations between unions and businesses.

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