Pound Sterling US Dollar (GBP/USD) Exchange Rate Recovers Ground on Easing Brexit Fears

Lull in Brexit Anxiety Encourages Pound Sterling US Dollar (GBP/USD) Exchange Rate Rally

A temporary lull in market anxiety over Brexit encouraged the Pound Sterling to US Dollar (GBP/USD) exchange rate to recover some of its lost ground this morning.

With trading volumes still relatively thin in the wake of the Christmas break GBP exchange rates were able to push sharply higher across the board in spite of a lack of fresh UK data releases.

Markets continued to speculate over the odds of the UK and EU reaching an agreement over Brexit during the truncated transition period, with the risk of the 2020 cliff-edge appearing to diminish.

As Pound Sterling (GBP) had seen some marked losses in the wake of the general election result this created the potential for a solid GBP exchange rate rally as investors piled back into the weakened currency.

As analysts at TD Securities noted:

‘Investors enjoyed a brief post-election honeymoon when the risk of a no deal crash out was considered all but eliminated. These hopes have diminished, although we note that the end-2020 potential cliff edge remains far off in the distance.’

Strengthening Market Risk Appetite Limits US Dollar Exchange Rate Upside

Support for the US Dollar (USD), meanwhile, proved muted thanks to a general uptick in market risk appetite.

As global trade tensions appeared to ease in the wake of China’s announced tariff cuts the appeal of the safe-haven US Dollar largely diminished.

While it remains to be seen whether a phase two US-China trade agreement can make it out of the starting blocks in the coming months this failed to limit the risk-positive mood of investors.

After the Richmond Fed manufacturing index fell short of forecast on Tuesday, slumping from -1 to -6 in December, confidence in the outlook of the US economy remained generally lacking.

Further Signs of US Manufacturing Weakness Set to Drag on US Dollar Demand

Worries over the health of the US economy could pick up further next week on the back of December’s Chicago PMI and Dallas Fed manufacturing index.

Fresh signs of a slowdown within the world’s largest economy may weigh heavily on USD exchange rates, with markets wary of the lingering impact of the long-running US-China trade dispute.

A sustained loss of momentum within the manufacturing sector could drag significantly on the fourth quarter growth rate, highlighting a level of vulnerability within the US economy.

As long as growth appears at risk the Federal Reserve could come under greater pressure to cut interest rates sooner rather than later, exposing the US Dollar to additional selling pressure.

GBP Exchange Rates Remain Vulnerable to Contracting UK PMIs

On the other hand, worries over the outlook of UK economy could see a resurgence next week with the release of December’s finalised UK PMIs.

Given the underwhelming nature of the initial PMI estimates markets are hoping to see some positive revision to the final figures, offering the Pound a potential rallying point.

Even so, as long as the manufacturing and services PMIs remain trapped in contraction territory the potential for GBP/USD exchange rate gains looks limited.

With Brexit-based uncertainty looking set to weigh on economic activity for some time yet to come if signs point towards a fourth quarter slowdown the Pound may fall out of favour once again.

Louisa Heath

Contact Louisa Heath