GBP/USD Exchange Rate Slips as Geopolitical Tensions Rattle Markets
The Pound US Dollar (GBP/USD) exchange rate has stumbled this morning, as growing tensions in the Russia-Ukraine crisis have triggered a flight to safety. As a result, the riskier Pound (GBP) has fallen against the safe-haven US Dollar (USD).
However, Friday’s strong UK GDP data and Bank of England (BoE) rate hike bets seem to be limiting Sterling’s losses.
US Dollar (USD) Firms amid Flight to Safety
The US Dollar is gaining ground this morning as geopolitical tensions weigh on the market mood.
Tensions on the Russia-Ukraine border have been heating up over the past week. On Thursday, Russia and its ally Belarus began ten days of joint military drills, in what many consider to be an aggressive gesture. The UK, US and other countries have told their citizens to leave Ukraine in case of a Russian invasion.
The potential fallout from such an invasion is weighing heavily on markets today, with investors flocking to safe havens, such as the US Dollar.
Kyle Rodda, an analyst at IG, explains:
‘Markets are preparing for the risk of war in Europe, and it’s adding to the complex of issues driving uncertainty and volatility in global markets currently. The concern is about the impact such a conflict will have on fragile energy markets, European economic growth, and the broader financial system if sanctions are slapped on Russia.’
The Russia-Ukraine crisis could drive USD exchange rates through the beginning of the week, as high-impact US data is in short supply. If the situation continues to deteriorate, then risk aversion may continue. As a result, the ‘Greenback’ would likely continue strengthening.
Looking further ahead, US retail sales on Wednesday could also boost USD. Economists expect sales to have increased by 1.8% in January, rebounding from December’s 1.9% slump.
UK CPI in Focus for the Pound (GBP)
Meanwhile, the Pound is subdued this morning amid the risk-off mood: despite being a major currency, GBP is sensitive to risk.
However, Friday’s fairly strong GDP data and BoE rate hike bets could be cushioning the downside. UK GDP grew by 7.5% in 2021 – its strongest growth since the second world war. This may limit GBP/USD’s losses if the current risk aversion continues through today’s session.
Tomorrow brings the UK’s latest raft of employment data. The results are forecast to show a continued recovery in the country’s labour market, although analysts don’t expect the figures to be as strong as in previous months.
The big release this week for GBP is the UK’s inflation rate for January. Forecasters expect inflation to have held steady at 5.4%. If this is the case, the Pound could slip as it would take some pressure off the BoE to continue aggressively hiking interest rates.
But if the UK CPI overshoots expectations, Sterling could strengthen.
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