Pound Sterling to US Dollar (GBP/USD) Exchange Rate Trends Near Week’s Worst Levels as US Non-Farm Payroll Report Mixed

Pound to US Dollar Exchange Rate Fails to Recover Despite Rise in US Unemployment

UPDATE: The Pound Sterling to US Dollar (GBP/USD) exchange rate remained unappealing on Friday afternoon, despite news that the US unemployment rate unexpectedly worsened.

US unemployment rose from 3.9% to 4.0% according to January’s Non-Farm Payroll report. Analysts noted that it was partially due to the impact of the US government shutdown, which lasted for much of January.

However, disappointment with the unemployment print was offset by the latest change in Non-Farm Payrolls, which unexpectedly surged to 304k.

As a result, the US Dollar (USD) easily held most of this week’s gains versus a weaker Pound (GBP).

Pound to US Dollar (GBP/USD) Exchange Rate Unable to Hold its Ground amid Brexit Fears

Market anxiety about how the Brexit process may turn out left the Pound Sterling to US Dollar (GBP/USD) exchange rate weakened over the past week. As a result, the Pound (GBP) was unable to benefit much from the US Dollar’s (USD) Federal Reserve-related weakness.

Despite the US Dollar’s weakness, GBP/USD opened last week at the interbank level of $1.32 and spent most of the week falling. In fact, GBP/USD shed over a cent throughout the week on Brexit jitters.

However, GBP/USD still trended well above the levels seen in the previous week and earlier in January, as the Pound saw its best month in a year throughout January.

This was due to hopes that the Brexit process could be delayed, and that a no-deal scenario could be avoided.

While no-deal Brexit fears returned over the past week, investors are still generally more optimistic about Brexit than they were at the end of last year.

The US Dollar has seen mixed demand this week, as global political uncertainties boost demand for safe haven currencies. However, Federal Reserve dovishness has dampened market demand for the US currency and this limited GBP/USD losses last week.

Pound (GBP) Exchange Rates Slide from Best Levels on Brexit Uncertainties and Manufacturing Slowdown

A brief attempt by the Pound (GBP) to advance on Friday morning was cut short when Britain’s latest manufacturing PMI from Markit was published, worsening market concerns about the impact Brexit uncertainty is having on Britain’s economy.

Britain’s January manufacturing PMI was forecast to have slipped from 54.2 to 53.5, but instead slumped to just 52.8. Analysts responded to the report by speculating that UK manufacturing could fall into recession in the coming months.

According to Rob Dobson, Director at IHS Markit:

‘January also saw manufacturing jobs being cut for only the second time since mid-2016 as confidence about the outlook slipped to a 30-month low, often reflecting ongoing concerns about Brexit and signs of a European economic slowdown. With neither of these headwinds likely to abate in the near-term, there is a clear risk of manufacturing sliding into recession.’

Investors are anxious that if the current level of Brexit uncertainty lasts throughout the year, it could damage economic activity for an even longer period of time than previously feared.

US Dollar (USD) Exchange Rates Benefit from Safe Haven Demand amid Brexit Jitters

For most of the week, demand for the US Dollar (USD) was subdued as concerns about US-China trade tensions and a more dovish Federal Reserve left the currency unappealing.

The US Dollar was unable to capitalise on safe haven demand either, amid concerns about how these factors would dent the US economic outlook.

However, its status as a safe haven currency did help it to sustain gains against the Pound (GBP). As Brexit uncertainties returned, investors perceived the US Dollar as safer than the British currency.

Overall though, the US Dollar’s gains may have been even stronger last week if not for the Federal Reserve’s dovish tone in its January policy decision on Wednesday.

The Federal Reserve surprised markets with a dovish tone, indicating it would be ‘patient’ on future US interest rate hikes.

The biggest surprise was how quickly the tonal change came, following a surprisingly hawkish tone in December.

Pound to US Dollar (GBP/USD) Exchange Rate’s Potential for Gains Limited without Further Brexit Developments

While last month’s rise in hopes for a Brexit delay or that a no-deal Brexit could be avoided left the Pound (GBP) much stronger than it was at the end of 2018, the Pound to US Dollar (GBP/USD) exchange rate’s potential for further gains is limited.

The Pound rose on the back of Brexit hopes, so unless there is a jump in speculation that a no-deal will be avoided or that a resolution is within reach, the British currency’s strength will be capped.

The UK government is not expected to be able to secure anything in renegotiation attempts, but any signs that the EU could offer concessions or that the formal Brexit date will be delayed would bolster Sterling demand.

Next week will also see the Bank of England (BoE) hold its February policy decision, but it is unlikely to be hugely influential for the outlook with Brexit uncertainty still in focus.

As for the US Dollar (USD), it is more likely to be influenced by further shifts in global risk-sentiment, as well as upcoming US ecostats.

Next Tuesday will see the publication of US non-manufacturing PMI data for January, with trade data following on Wednesday.

Any major developments in US-China tensions or US politics would also influence the Pound to US Dollar (GBP/USD) exchange rate next week.

Josh Ferry Woodard

After leaving university in 2011 Josh briefly worked as a currency analyst in the South West of Cornwall. Josh continued monitoring the currency markets and publishing exchange rate analysis after moving to London in 2012, with a particular focus on the impact of economic and political stimuli on forex. Josh was a regular contributor to The Telegraph’s weekly currency feature for several years.

Contact Josh Ferry Woodard