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Pound US Dollar (GBP/USD) Exchange Rate Stumbles as US Trade Deficit Narrows Sharply

March 27, 2019 - Written by Frank Davies

Narrowed US Trade Deficit Dents Pound Sterling US Dollar (GBP/USD) Exchange Rate

A better-than-expected narrowing of January’s US trade deficit put the Pound Sterling to US Dollar (GBP/USD) exchange rate under fresh pressure on Wednesday.

Although forecasts had pointed towards a narrowed deficit investors were still encouraged by news that the deficit had fallen from -59.9 billion to -51.1 billion on the month.

This suggests that the US economy is in a stronger position than previously thought, even in the face of global trade tensions and growth worries.

Even so, the GBP/USD exchange rate only saw limited losses in the wake of the data thanks to a fresh bout of optimism regarding Brexit.

Hopes of Brexit Progress Shore up Pound Sterling (GBP) Exchange Rates

With Conservative MPs granted a free vote on the proposed alternatives to Theresa May’s already rejected Brexit deal the Pound was encouraged to trend higher.

May’s move fostered hopes that Parliament could reach a consensus on the path forward, reducing the odds of a no-deal Brexit.

While it remains to be seen which proposal, if any, can command a majority among MPs this tentative sign of progress was enough to shore up GBP exchange rates on Wednesday afternoon.

However, the GBP/USD exchange rate looks vulnerable if this latest round of parliamentary votes fails to ease the sense of uncertainty that still surrounds the outcome of the Brexit process.

US Dollar (USD) Exchange Rates Vulnerable to Signs of Slowing US Growth

USD exchange rates could come under renewed pressure on Thursday if the finalised fourth quarter annualised US gross domestic product confirms a loss of economic momentum.

As markets already have concerns regarding the health of the US economy, with the odds of a potential recession having risen, any signs of slowdown could dent the US Dollar.

Even so, James Knightley, Chief International Economist at ING, maintains a positive outlook, commenting:

‘We continue to look for a figure of 1.5-2% annualised GDP growth, despite the current bout of market pessimism on the US economic outlook. However, this improvement in the trade position may only be temporary as US business reverts back to more 'usual' import practices in 2Q.’

If Federal Reserve policymakers continue to show signs of caution this could also weigh on the US Dollar in the days ahead, though, even if the current mood of market risk aversion persists.

GBP/USD Exchange Rate Volatility to Persist amid Brexit Developments

The results of the latest parliamentary votes look set to drive fresh volatility for the GBP/USD exchange rate in the near term.

Without positive progress towards a Brexit resolution GBP exchange rates may experience another round of selling pressure.

Fresh weakness could also be in store for the Pound on Friday, with investors expecting another monthly decline in the GfK consumer confidence index.

Unless consumers show signs of shrugging off the wider sense of Brexit malaise demand for the Pound looks set to ease ahead of the weekend.
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