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GBP to USD Exchange Rate Dips Again as Chinese Data Causes Safe Haven Rush

July 16, 2020 - Written by Tim Boyer

A combination of a gloomy UK outlook and higher market demand for safe haven currencies is keeping the British Pound to US Dollar (GBP/USD) exchange rate under pressure today. Investors are hesitant to buy the US Dollar as a safe haven too much, but the Pound’s weakness is making it easier for the US Dollar to advance. Looking ahead, UK and US coronavirus situations will remain key to exchange rate movement.

Following last week’s fairly solid advance from 1.2483 to 1.2622, this week’s GBP/USD movement has been more mixed. GBP/USD briefly jumped up to a high of 1.2666, the pair’s best level in almost a month, before seeing more bearish movement.

Attempts for GBP/USD to hold its ground have been limited. At the time of writing on Thursday, GBP/USD is trending near the level of 1.2532 after having shed most of last week’s gains.

Still, the US Dollar’s weakness continues to linger which is overall limiting the Pound to US Dollar exchange rate’s potential to fall.

GBP Exchange Rates Struggle to Benefit from Week of Underwhelming UK Data

After attempting to gain last week, the Pound outlook has taken another turn for the gloomy this week.

Earlier in the week, Britain’s latest growth rate results were published. They indicated that Britain’s economy was performing worse than expected amid the coronavirus pandemic.

Analysts reacted to the news by saying that Britain’s economy was unlikely to see a v-shaped recovery any time soon. UK data published since then hasn’t had much of a positive impact on the Pound outlook either.

Inflation data failed to offset concerns of a long period of weak price pressures. Today’s UK job market report also contained many figures filled with uncertainties, and warnings that Britain’s job market would still see months more weakness ahead.

According to Jonathan Athow, Deputy National Statistician at the Office for National Statistics (ONS), which compiles the report:

‘As the pandemic took hold, the labour market weakened markedly, but that rate of decline slowed into June, though this is before recent reports of job losses.

There are now almost two-thirds of a million fewer employees on the payroll than before the lockdown, according to the latest tax data.’

On top of the lack of strong UK data, Sterling was also under pressure due to lower market appetite for taking risks.

USD Exchange Rates Benefit from Market Concerns over China’s Poor Retail Sales

A shift in global market risk-sentiment was also partially responsible for the Pound to US Dollar exchange rate’s losses today.

The US Dollar is a currency commonly correlated to market safe haven demand. Meanwhile, the Pound is currently seen as fairly risky amid Britain’s coronavirus and Brexit worries.

As a result, the latest market shock over Chinese retail sales data knocked GBP/USD lower. Investors spooked by the data were more likely to buy the safe haven US Dollar.

While China’s latest growth data showed the world's second biggest economy continued to grow during the second quarter, concerns persisted about the spending habits of Chinese citizens amid poor retail stats.

According to Stephen Innes, Chief Global Markets Strategist at AxiCorp:

‘China’s economic data for June and Q2 show that it’s easier for it to normalize the supply side of the economy with industrial production +4.8% y/y, than the demand side with retail sales -1.8% y/y, after the covid-19 shock.

No matter how much stimulus and fiscal sugar you try to entice consumers with, they will not leave their apartment and go on a spending spree until they feel confident the landscape is virus-free.’

On top of this, the latest US retail sales results impressed. The US Dollar’s appeal was limited slightly by concerning US job market data though.

GBP/USD Exchange Rate Forecast: US Dollar Demand Likely to be Limited

Investors may be hesitant to keep selling the Pound to US Dollar exchange rate even lower.

While the Pound outlook is unappealing amid concerns over Britain’s economic and Brexit outlooks, the British currency has already seen plenty of weakness on these aspects.

Meanwhile, the US economic outlook continues to worsen as the number of coronavirus cases in the nation surges. As the US government is showing little sign of acting more on the pandemic, analysts are highly concerned about the US outlook.

As a result, the US Dollar may not see much appeal even if safe haven demand rises, as investors question the currency’s appeal as a safe haven.

If US data continues to disappoint investors, this is likely to make it easier for GBP/USD to avoid further losses and hold its ground.

Tomorrow will see the publication of US housing starts and building permits data.

Next week’s data includes PMI projections, and coronavirus and Brexit developments will of course continue to influence the Pound to US Dollar exchange rate as well.
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