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GBP/USD Exchange Rate: All Eyes on How the UK’s ‘Freedom Day’ Unfolds

US Dollar Currency Forecast

GBP/USD Exchange Rate Slumps as UK Covid Cases Soar

The Pound US Dollar (GBP/USD) exchange rate has tumbled to a five-month low today, as fears over surging coronavirus cases weigh on the Pound and support the safe-haven US Dollar.

The pair is currently trading at around $1.366, down almost a cent from the beginning of today’s European session and over two cents from last week.

Pound (GBP) Beset by Coronavirus Fears

The Pound (GBP) has slumped as the UK lifts most lockdown restrictions despite warnings from the scientific community.

Soaring coronavirus cases and fears of new virus variants have dragged heavily on the Pound, and investors will be watching to see how the situation unfolds. Any negative news will put more downward pressure on GBP.

Sterling faces further losses this afternoon as the Bank of England’s (BoE) Professor Jonathan Haskel poured cold water on the taper talk sparked by the UK’s above-expected CPI last week.

The UK’s inflation rate soared to 2.5%, prompting two BoE policymakers to suggest the bank may need to tighten monetary policy ‘fairly soon’.

However, in a webinar this morning, Haskel said:

‘For now, tight policy is not the right policy… The economy is not fully recovered yet and faces two headwinds over the coming months: the highly transmissible Delta variant and a tightening of the fiscal stance.’

Haskel’s dovish tone matches that of BoE Governor Andrew Bailey, who advocated patience and caution following the CPI report, indicating a split among members of the BoE monetary policy committee.

With a sooner-than-expected tightening of policy looking less likely, this may weigh on the Pound through the week.

Sterling could find modest support towards the end of the week, with some positive data expected from the UK. Factory output, business optimism and retail sales are all expected to improve, while the UK’s PMIs are forecast to ease slightly but still remain strong.

Will Continued Risk Aversion Support the US Dollar (USD)?

Meanwhile, the US Dollar (USD) has strengthened as the prevailing risk-off mood drives up demand in the safe-haven currency.

The global surge in cases of the Delta coronavirus variant, inflation fears and US-China tensions have rattled investors, amplifying the appeal of the safe US Dollar.

Edward Moya, Senior Market Analyst at OANDA, said:

‘Risk aversion is firmly in place as the Delta Covid variant spread is triggering a flight to safety as global economic concerns intensify. Global investors are growing anxious and selling stocks, commodities, and even cryptocurrencies to buy US Treasuries.’

With risk appetite wiped from the market, London and New York are experiencing a ‘panic-like’ selloff of stocks, with the Dow down by over 2% and the FTSE 100 down by 2.7%.

If the market mood remains anxious, the US Dollar may continue to enjoy an elevated position. However, a similar selloff in stocks two weeks ago led to investors bargain-hunting for cheap deals, triggering a rebound in both the stock market and global risk appetite.

USD investors will no doubt be watching the UK to see how ‘freedom day’ plays out.