Pound Sterling to US Dollar (GBP/USD) Exchange Rate Struggles to Capitalise on Lower UK Unemployment

Pound Sterling US Dollar (GBP/USD) Exchange Rate Benefits as UK Unemployment Rate Hits Fresh Low

An unexpected improvement in the UK unemployment rate saw the Pound Sterling to US Dollar (GBP/USD) exchange rate push higher today.

Employment rose to its highest level since comparable records began in the three months to November, pushing the unemployment rate down to just 4.0%.

This suggests that the underlying health of the UK economy is more robust than previously thought, even in the face of continued political uncertainty.

Demand for Pound Sterling (GBP) also picked up in response to a stronger-than-forecast acceleration in wage growth during the same period.

With wages continuing to solidly outpace the domestic inflation rate the Bank of England (BoE) could be encouraged to take a more hawkish outlook in the months ahead.

Pound Sterling (GBP) Exchange Rate Gains Limited by Brexit Unease

However, the GBP/USD exchange rate struggled to hold onto its initial boost as speculation over Brexit continued to weigh on the minds of investors.

With the EU refusing to reopen talks on the Irish backstop, a core pillar of Theresa May’s Brexit ‘Plan B’, any progress looks unlikely in the near future.

Until the UK Parliament shows signs of moving towards an agreement on Brexit any GBP exchange rate gains could continue to prove short-lived.

While a sense of political unease is also limiting the appeal of the US Dollar (USD), as the partial US government shutdown rumbles on, this was not enough to give the GBP/USD exchange rate a significant boost.

Negative UK Business Optimism to Weigh on GBP/USD Exchange Rate

The mood towards the Pound could also deteriorate on Wednesday with the release of the latest CBI industrial trends orders and business optimism indexes.

Another month of weakening business sentiment looks likely in the face of recent Brexit developments, casting a larger shadow over the outlook of the UK economy.

If the index slides from -16 to -22 as forecast the GBP/USD exchange rate could return to a downtrend, reversing some of its recent recovery.

Unless the UK economy can demonstrate further signs of resilience ahead of the approaching Brexit deadline investors are likely to see limited incentive to favour the Pound over its rivals.

Jobless Claims Data to Provoke US Dollar (USD) Exchange Rate Volatility

While US data has proved a little thin on the ground this week the US Dollar looks set for fresh volatility on the back of the latest initial and continuing jobless claims data.

As the labour market is expected to show some signs of loosening, with the number of jobless claims rising modestly, USD exchange rates could come under renewed pressure on Thursday.

With the ongoing government shutdown already dragging on the US economy any rise in unemployment may drive the US Dollar down across the board.

Evidence that the labour market is starting to cool would give the Federal Reserve further reason to leave interest rates on hold in the months ahead, a prospect which would offer the GBP/USD exchange rate a boost.

Hannah Wilson

Contact Hannah Wilson