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GBP to USD Exchange Rate Avoids Major Losses despite Gloomy UK Ecostats

January 22, 2021 - Written by Frank Davies

Despite some broadly disappointing UK ecostats published at the end of the week, the British Pound to US Dollar (GBP/USD) exchange rate is still on track to end the week notably higher. Market sentiment has solidly improved after this week’s political events, so investors have even less reason to hold onto the safe haven US Dollar. As for the Pound though, its potential for further gains is limited as the domestic coronavirus situation remains highly concerning.

Since opening this week at the level of 1.3583, GBP/USD has largely been trending higher as the Pound capitalises on US Dollar weakness.

Towards the end of the week, GBP/USD touched on a high of 1.3742. This was the best level for GBP/USD in over two and a half years, since the first half of 2018.

While the Pound is tumbling back lower today, GBP/USD is on track to sustain considerable gains this week. GBP/USD is trending in the region of 1.3660 as US Dollar weakness means the pair is still in for gains of almost a cent.

GBP Exchange Rates Tumble as UK Data Paints Gloomy Outlook for Britain’s Coronavirus Lockdown

After attempting to advance for much of the week so far, the Pound is being knocked lower again today.

Concerns that Britain’s economy is being hit hard by the coronavirus pandemic intensified today, when the latest key UK data came in notably worse than forecast.

In the middle of the week, the Pound benefitted from better than expected UK inflation rate data. However, while price pressures were better in December, today’s retail sales data revealed that actual consumer activity was even lower than hoped.

UK retail sales printed at 0.3% month-on-month, and the previous month’s figure was revised lower to –4.1%. The yearly retail sales figure only rose from 2.1% to 2.9%m rather than reaching the expected 4.0%.

What’s more, UK PMI projections also fell short of expectations, showing that the third UK coronavirus lockdown is having a big impact on Britain’s economy.

According to Chris Williamson, Chief Business Economist at IHS Markit:

‘A steep slump in business activity in January puts the locked-down UK economy on course to contract sharply in the first quarter of 2021, meaning a double-dip recession is on the cards.

Services have once again been especially hard hit, but manufacturing has seen growth almost stall, blamed on a cocktail of COVID-19 and Brexit, which has led to increasingly widespread supply delays, rising costs and falling exports.’

USD Exchange Rates Unappealing as Market Confidence Continues to Rise

Despite concerns about the coronavirus pandemic’s impact on Britain, market confidence over the global economy’s ability to eventually recover is keeping appetite for safe havens low.

As the US Dollar is a safe haven currency, this week’s boosts to confidence are weighing on the US Dollar.

The inauguration of new US President Joe Biden went smoothly and there are no signs of big US political complications in the near future. This is only making the safe haven US Dollar even less popular.

Still, GBP/USD has fallen back from its best levels due to both Pound losses and concerns that the US fiscal spending package may not be as big or quick as some hoped. According to Yohay Elam, Analyst at FXStreet:

‘Republicans seem reluctant to back additional spending. While Democrats have room to move forward on their own, support from the opposition would ensure a large package and a quick delivery.’

GBP/USD Exchange Rate Forecast: Coronavirus Optimism to Drive Pair’s Direction

For now, the Pound lacks the drive to rise much higher. However, GBP/USD could still rise if the safe haven US Dollar keeps weakening.

The global economy is still expected to recover from the coronavirus pandemic, despite lockdowns lasting longer than hoped. This means investors still have little reason to buy safe havens.

If Britain’s coronavirus situation shows signs of recovering, the Pound’s appeal will strengthen as well.

If next week’s UK ecostats beat forecasts, they could offset some of the concerns caused by today’s weak data. This may also boost Britain’s coronavirus recovery hopes and the Pound’s appeal.

According to FXStreet Analyst Yohay Elam, the US Dollar’s movement as a safe haven could also be influenced by how soon the Joe Biden administration is able to deliver fiscal stimulus:

‘Biden is slated to deliver a speech on the economy later on Friday. The president may either go for quick and small wins – pushing non-controversial issues in early February – or aiming for the larger package. The latter would take time. Markets would like to see more funds and the sooner, the better. The safe-haven Dollar would drop when markets rise and fall if they return to gains.’

Overall, focus on the coronavirus pandemic and US fiscal stimulus remains key for the direction of the Pound to US Dollar exchange rate.
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