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Central Bank Rate Cut Talk Keeps Pound to US Dollar Exchange Rate Outlook Jittery

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Pound to US Dollar Exchange Rate Struggles for Direction as Both Currencies Weaken

Despite a shock Federal Reserve interest rate cut hitting the US Dollar (USD) lower yesterday, the Pound Sterling to US Dollar (GBP/USD) exchange rate continues to struggle this week. The Pound (GBP) is seeing similar weakness, keeping the pair jittery.

While Pound weakness led GBP/USD to tumble this week, the pair has been trending in a narrow region since markets opened this week.

GBP/USD opened this week at the level of 1.2819 and has since trended a little lower. However, the pair has been fluctuating within a cent, between lows of 1.2747 and highs of 1.2849.

At the time of writing, GBP/USD is trending near the level of 1.2783. Sterling is once again weaker today on Bank of England (BoE) speculation. Meanwhile, US Dollar investors await upcoming US data and further Federal Reserve signals.

Pound (GBP) Exchange Rates Flounder as Bank of England (BoE) Rate Cut Speculation Rises

The Pound has been among the market’s least appealing major currencies this week. As Bank of England (BoE) interest rate cut bets rise, the Pound has even fallen against the broadly weak US Dollar.

Due to rising expectations that the coronavirus Covid-19 will spread in Britain, speculation is rising that the BoE will need to cut interest rates to protect Britain’s economy.

According to Jeremy Stretch, Head of G10 Currency Strategy at CIBC Capital Markets:

‘Certainly the market is priced for a 25 bps cut at the March meeting, so the market is anticipating the BoE will use up its arsenal,’

Covid-19 fears and rising BoE rate cut bets have been the primary cause of Pound losses, but recent UK data hasn’t done much to help the British currency.

Britain’s February services PMI data fell short of projections, sliding to 53.2. The overall composite PMI came in with a weaker than expected 53.0.

US Dollar (USD) Exchange Rates Weak Since Shock Federal Reserve Rate Cut

The US Dollar has also been one of the weakest major currencies in the past week. It has only gained against the Pound due to Sterling’s broad weakness.

Rising fears that the coronavirus Covid-19 will hurt the US economy led to a surge in Federal Reserve interest rate cut bets.

Then, the Fed shocked markets yesterday by announcing an emergency interest rate cut of 50 basis points. This was one of the rare occasions in which the Fed adjusted monetary policy outside of a designated policy decision.

However, while the news was a shock to investors, it also didn’t do much to boost market hopes that the Fed’s move would be enough to prevent damage from Covid-19. According Chris Turner, Global Head of Markets and Regional Head of Research at ING:

‘A 50 basis point rate cut from the Federal Reserve was never going to be a panacea for the Covid-19 economic shock, but yesterday’s 3% fall in US equities serves as a reminder of the limitations of monetary policy.’

Pound to US Dollar (GBP/USD) Exchange Rate Awaits Developments in Brexit and US Data

Investors will likely remain hesitant to move too much on the Pound and US Dollar in the coming sessions, with rising Covid-19 fears and central bank rate cut bets keeping both currencies weak.

However, if there are any surprises in Brexit news or data in the coming sessions, GBP/USD could see a more solid shift in movement.

UK and EU officials have been holding the first round of Brexit transition period negotiations this week.

The first round of talks are expected to end tomorrow, and any reaction or developments could be considerably influential for the Pound outlook. For example, if officials take a negative stance on negotiation progress, hard Brexit fears will rise and Sterling will fall.

US Dollar investors will react more to upcoming US data. Factory orders stats will be published tomorrow with Non-Farm Payroll results on Friday.

NFP data is closely watched by the Federal Reserve, so surprising results could influence the Pound to US Dollar (GBP/USD) exchange rate.