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Pound US Dollar (GBP/USD) Exchange Rate Stumbles as EU Launches Legal Action Against UK

October 5, 2020 - Written by Frank Davies

Pound US Dollar (GBP/USD) Exchange Rate Slips as EU Begins Legal Action

Rising tensions between the UK and EU prompted the Pound Sterling to US Dollar (GBP/USD) exchange rate to slump sharply.

As European Commission president Ursula von der Leyen announced the EU’s decision to move ahead with legal action against the UK the mood towards the Pound turned distinctly bearish.

With the draft internal market bill set to breach the established withdrawal agreement worries over the future relationship between the two sides mounted.

As the final round of Brexit discussions have yet to yield any breakthrough there appeared little reason for Pound optimism at this juncture, leaving the GBP/USD exchange rate exposed to selling pressure.

Hopes of progress towards a fresh package of US fiscal stimulus helped to shore up demand for the US Dollar, meanwhile, even as market risk appetite generally improved.

Hopes of US Fiscal Stimulus Boost USD Exchange Rates

Although political tensions remained heightened in the wake of the first presidential election debate there were signs of potential progress towards an agreement overnight.

While fiscal stimulus measures are still yet to be agreed the mere prospect of progress was enough to bolster market confidence.

USD exchange rates could gain further traction this afternoon if September’s ISM manufacturing PMI picks up on the month as forecast.

As long as the manufacturing sector continues to demonstrate signs of growth even as the initial post-lockdown boost fades the US Dollar is likely to remain on a stronger footing.

Signs that the third quarter US gross domestic product could deliver solid growth would give investors less reason to be wary over the economic outlook, in spite of the ongoing Covid-19 crisis.

However, if the manufacturing sector instead loses some of its recovery momentum this could help to put a temporary floor under the GBP/USD exchange rate on Thursday afternoon.

Non-Farm Payrolls Report Set to Weigh on US Dollar Demand

Further volatility is likely in store for USD exchange rates ahead of the weekend with the release of the latest non-farm payrolls report, meanwhile.

With forecasts pointing towards a weaker headline payrolls figure the mood towards the US Dollar could sour on Friday.

Any evidence that the US labour market is struggling to tighten in the face of ongoing economic disruption would limit the potential for US Dollar gains in the near term.

Even so, as the unemployment rate still looks set to improve from 8.4% to 8.2% in September this could offer USD exchange rates a fresh rallying point.

If the labour market appears to be moving in the right direction the GBP/USD exchange rate may remain on the back foot.
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