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Pound US Dollar (GBP/USD) Exchange Rate Slides on Renewed US-China Tensions

July 14, 2020 - Written by John Cameron

Pound Sterling US Dollar (GBP/USD) Exchange Rate Falls as Traders Flock Back to Safety

The Pound Sterling US Dollar (GBP/USD) exchange rate edged -0.3% lower. This left the pairing trading at around $1.2521.

The US Dollar edged higher on Tuesday as renewed concerns about US-China relations and rising coronavirus cases dented risk appetite.

Growing tensions between the US and China sent traders flocking back to safety, with the latest threats over US financial markets, civil liberties in Hong Kong, and territorial claims in the South China Sea.

A senior State Department official told Reuters that the Trump administration plans to get rid of a 2013 agreement. The agreement between Washington and Beijing auditing officials could lead to a broader crackdown on Chinese firms listed on US stock markets.

According to Junichi Ishikawa, senior foreign exchange strategist at IG Securities:

‘The focus has shifted to whether or not the next round of coronavirus lockdowns will be large enough to damage economic growth.

‘The Hong Kong problem could potentially lead to new trade friction. Negative developments on either front could cause stocks to adjust lower, and drive some safe-haven flows to the Dollar and the Yen.’

Meanwhile, growing coronavirus cases in the United States continued to weigh on markets. Risk appetite took a further hit after the most populous US state, California placed new restrictions as cases grew.

Pound (GBP) Falls as Traders Worry About ‘Genuine Recovery’

Sterling edged lower against the safe-haven US Dollar despite data showing the UK took its first steps towards recovery after the coronavirus crisis.

However, the rebound was less than expected, as GDP edged up by just 1.8% as the lockdown measures were eased. This followed April’s record contraction of -20.3%.

GBP slumped as data showed in the three months to May the economy shrunk by -19.1%, and compared to just a year earlier the economy was -24% smaller.

Commenting on the latest data, Suren Thiru, head of economics at the British Chambers of Commerce said:

‘The pick-up in output in May is more likely to reflect the partial release of pent-up demand as restrictions began to loosen, rather than evidence of a genuine recovery.’

Sterling also remained under pressure as many worried about employment. The Bank of England (BoE) has already warned of a large rise in the jobless rate as the temporary support measures are due to end.

Commenting on today’s data, UK Finance Minister Rishi Sunak said:

‘Today’s figures underline the scale of the challenge we face. I know people are worried about the security of their jobs and incomes.’

Added to this, Britain’s Office for Budget Responsibility said the economy could shrink by -14% this year as government borrowing reached £400 billion if there is a lasting impact from the coronavirus.

Pound US Dollar Outlook: UK and US Inflation in Focus This Week

Looking ahead, the US Dollar (USD) could make further gains against the Pound (GBP) following the release of inflation data.

If US inflation edged higher than expected in June it will offer the ‘Greenback’ some support.

Meanwhile, Tuesday could see Sterling suffer losses following the release of Britain’s inflation rate.

If UK inflation does not rise as high as expected in June, it will send the Pound US Dollar (GBP/USD) exchange rate lower.

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