Blog: Pound US Dollar Exchange Rate Slumps On Brexit Headwinds – Exchange Rates UK

EY now sees UK GDP rising by 6.9% this year, down from 7.6% forecast in the summer; growth in 2022 is expected to sit around 5.6%. By 2023, GDP could sink back down to 2.3%, before sagging to a lacklustre 1.8% in 2024 and 2025.

US Dollar (USD) Exchange Rates Supported by Treasury Yields, Risk Averse Markets

The US Dollar is trading up against the majority of its peers despite a lack of data so far today, as a risk-off market mood favours the safe-haven currency. Elevated US Treasury bond yields also continue to underpin the USD, alongside investor confidence that the Fed will soon be compelled to raise interest rates.

Risk-off trading is inspired by worries about surging COVID-19 cases across Europe, as Austria becomes the first country to re-impose a national lockdown. The country’s Health Minister Wolfgang Mueckstein told reporters:

‘It is a situation where we have to react now. A lockdown – a relatively tough method, a sledgehammer – is the only option to reduce the numbers [of infections] here.’

Many EU citizens, however, feel that their freedom is being unnecessarily curtailed. Tens of thousands of protesters – many from far-right groups – marched through Vienna over the weekend with fire-lit torches and banners saying ‘My body, my choice’, burning face masks in a symbolic gesture of dissent.

In domestic news, the majority of economists now predict that the Federal Reserve will raise interest rates late next year, earlier than expected just a month ago. The shift in rhetoric aligns official and market expectations, and follows recent news that US inflation hit a 30-year high last month.

Most respondents to a Reuters poll said the Fed should move even sooner to combat inflation. According to CNBC, investors are expecting a more aggressive response from the Federal Reserve than policymakers are indicating, with the trading market anticipating at least two and possibly three hikes in 2022.

Traders see a 65% chance of the first hike coming in June, according to the CME’s FedWatch tool. Economists David Mericle and Spencer Hill from Goldman Sachs report:

‘Fed officials look at many measures, and it increasingly appears that the full set of inflation data will look quite hot on a year-on-year basis around the middle of next year when tapering ends. As we noted recently, this increases the risk of an earlier hike in 2022.’

GBP/USD Exchange Rate Forecast: PMI Data to Extend Downtrend?

Looking ahead, PMI data from both the UK and America is likely to influence trading tomorrow.

UK data is set to show a reduction in manufacturing and services activity, potentially weighing upon the Pound; meanwhile, US activity is expected to have increased in October, an eventuality which may inspire ‘Greenback’ tailwinds.

Other external factors may also influence GBP/USD, including Brexit developments and general risk sentiment.

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