The risk-on mood and positive market sentiment undermined the safe-haven US dollar and helped to push the pound higher. Today was the third consecutive day the pound rose, as the positive mood in equity markets pushed the US dollar lower and supported the pound.

However, analysts warn that recession fears and Brexit worries could limit any further gains, ahead of BoE Governor Andrew Bailey’s speech later on Monday.

Global economic concerns

With the global economic outlook deteriorating and major economies fearing stagflation, any potential gains for the pound will be limited, while the US dollar could rise as a safe-haven currency. Additionally, the Russia-Ukraine war and the latest Covid-19 lockdowns in China could pose considerable challenges to the global economy. Investors also remain concerned with any aggressive moves by major central banks to curb inflation, since, if interest rates rise too quickly, this can create a chain reaction that will affect the domestic and global economy and create a recession in some cases.

Brexit

Any further upside potential for the pound to US dollar exchange rate could be limited due to Brexit concerns. The current tensions and disagreement between the UK and the EU over the Northern Ireland protocol (NIP) might deter investors from trading the GBP/USD pair, analysts have noted. Boris Johnson's government has announced its intention to introduce legislation that could unilaterally suspend the protocol, fuelling fears about a potential trade war.

The Prime Minister and Bank of England (BOE) Chief Economist Huw Pill have attempted to calm markets by saying that policymakers have the resources to fight the risks from Brexit and the Russia-Ukraine crisis. On Friday, Johnson said he would have to use fiscal firepower to help people through the cost-of-living crisis: “In the months ahead we are going to have to do what we did before, we’re going to use our fiscal firepower that we built up, that we have, to help. We’re going to put our arms around the British people again as we did during COVID.”

BoE’s Pill mentioned on Friday that the Bank of England will need to raise interest rates further to fight rising inflation.

What to look forward to for the pound

  • Looking forward, a speech by Bank of England Governor Andrew Bailey at the Oesterreichische National Bank Annual Economic Conference, in Vienna will be key. The BoE Governor will speak with a policy panel that will focus on "Monetary policy, policy interaction and inflation in a post-pandemic world with severe geopolitical tensions."  
  • Any news and developments on Brexit, inflation and the war in Ukraine will provide further direction to the pound.

In the absence of any major market-moving economic data, investors will closely watch the BoE Governor Andrew Bailey's scheduled speech later. The broader market risk sentiment will influence the pound to US dollar exchange rate and provide some direction to the currency pair.

With the current volatility and concerns about an economic slowdown, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.