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Pound US Dollar (GBP/USD) Exchange Rate Rises, Covid-19 Fears Raise Federal Reserve Rate Cut Odds

GBP/USD Exchange Rate Edges Higher as Fed Rate Cut Fears Weaken ‘Greenback’

The Pound US Dollar (GBP/USD) exchange rate rose by 0.5% today, with the pairing currently trading around $1.299 as China’s coronavirus outbreak has now increased the odds of an interest rate cut from the Federal Reserve.

Cleveland Federal Reserve President Loretta Mester said that she saw some ‘downside risk’ to the US economy due to the Covid-19’s impact on the global economy, but said that she would not support a rate cut from the central bank.

Mester added:

‘At this point, it is difficult to assess the magnitude of the economic effects, but this new source of uncertainty is something I will be carefully monitoring.’

With odds rising over a rate cut from the Fed, however, market confidence in the ‘Greenback’ has begun to slip as markets seek out safe currencies like the Swiss Franc instead.

Today saw the release of the US Housing Price Index for December, which beat forecasts and rose by 0.6%. However, this failed to boost USD as coronavirus fears continue to darken the outlook for the US economy in the near-term.

GBP/USD Exchange Rate Improves Despite Rising Brexit Fears

The Pound (GBP) gained on the weakened ‘Greenback’ today as investors flock to Sterling as an alternative amid rising concerns that the coronavirus could weaken global-trade related economies like the Eurozone and the US.

Paul Meggyesi, Head of Research at JP Morgan, commented:

‘GBP continues to perform idiosyncratically rather than as a traditional reserve currency… [However, the] risk of no-deal [Brexit] come December, which we continue to believe the market underappreciates and thus underprices, leaves a low ceiling for the currency, but considerable downside.’

Sterling’s gains are likely to be short-lived, however, as Brexit concerns continue to rise following the release of the EU’s trade negotiating mandate.

Michel Barnier, the EU’s chief Brexit negotiator, urged the UK to remain ‘open and fair, free and fair’ to encourage ‘high quality access to the single market’.

However, with Downing Street’s hard position on trade negotiations, Pound investors are nervous that the UK could renege on its Brexit pledges and threaten a no-deal between the UK and EU later on this year.

GBP/USD Outlook: Could Brexit Fears Weigh on the Sterling this Week?

US Dollar (USD) investors will be looking ahead to tomorrow’s release of January’s US New Home Sales report. Any signs of improvement could boost the USD/GBP exchange rate.

The GBP/USD exchange rate will, however, continue to be driven by Brexit developments this week. If we see the UK continuing to diverge from the EU on issues of trade, however, we will likely see the Pound begin to sink on fears of a no-deal.