Pound US Dollar Exchange Rate Volatile

The Pound US Dollar (GBP/USD) exchange rate initially traded a wide range on Monday and before narrowing as the next UK Prime Minister was announced.

At the time of writing, GBP/USD was trading at around $1.1284, which was virtually unchanged from Monday’s opening rate.

Pound (GBP) Exchange Rates Mixed as Sunak is Elected New Prime Minister

The Pound (GBP) traded in a broad range on Monday as Rishi Sunak was announced the UK’s next Prime Minister.

Rishi became the only candidate for the race, when Penny Mordaunt dropped out. Markets are hoping that Rishi, who is perceived as a safe-pair of hands, will be able to ease recent market tension. However, there was little doubt Sunak had a hard job ahead to repair the UK’s economic credibility.

The British Chambers of Commerce’s director general Shevaun Haviland said:

‘The new Prime Minister must be a steady hand on the tiller to see the economy through the challenging conditions ahead.

This means setting out fully costed plans to deal with the big issues facing businesses; soaring energy bills, labor shortages, spiraling inflation, and climbing interest rates.’

Whilst the Pound had been buoyed by politics over Monday’s trading session, it did face some headwinds as a result of the latest UK PMIs after October’s preliminary figures reported a larger-than-expected contraction in the vital private sector economy.

US Dollar (USD) Exchange Rates’ Gains Limited amid Upbeat Market Mood

The US Dollar (USD) was muted against the Pound, but up against the majority of its peers on Monday afternoon.

The upside was caused by a risk averse market mood. However, these gains gradually faded as risk appetite improved.

Strengthening bond yields appeared to buoy USD on Monday. The bond yields began to recover as investors corrected their aggressive sell-off of the US Dollar on Friday.

USD exchange rates plunged at the end of last week in response to the Federal Reserve who made comments signaling the next interest rate hike wouldn’t be 75bps.

Fed policymaker Mary Daly said on Friday that rising inflation made it ‘really challenging’ to not pursue aggressive interest rate hikes but that:

‘[T]he time is now to start talking about stepping down. The time is now to start planning for stepping down.’

Despite this correction, markets are still hopeful for a hefty hike at the Fed’s next policy meeting. There is an expectation that US interest rates will hit between 3.75% to 4.00% by the end of the year.

GBP/USD Exchange Rate Forecast: GBP to be Extend Recovery Under Sunak?

Looking ahead the Pound US Dollar exchange rate could be driven by UK political developments.

Sunak could be sworn into office as early as Monday evening. As Liz Truss hands over the role the Pound could firm on the expectation that the new prime minister will restore credibility to GBP. However, some Sterling volatility could remain as markets still adjust after weeks of political turmoil.

Turning to the US Dollar in the absence of any impactful data, the currency will likely trade in accordance to risk appetite. It’s possible that risk aversion could push investors back to the safe-haven ‘Greenback’ during overnight trade.