Pound US Dollar (GBP/USD) Exchange Rate Stumbles on Surprise UK GDP Contraction
A surprise contraction in February’s monthly UK gross domestic product reading saw the Pound Sterling to US Dollar (GBP/USD) exchange rate come under fresh pressure.
While forecasts had pointed towards a modest 0.1% uptick in growth on the month the reading instead clocked in at -0.1%.
The revelation that the UK economy had already started to shed momentum before the impact of Covid-19 prompted a country-wide shutdown weighed heavily on Pound Sterling (GBP).
However, as the Bank of England (BoE) unexpectedly granted an emergency extension to the Treasury’s overdraft facility this helped to give GBP exchange rates some renewed traction.
This move encouraged hopes that further fiscal support is on the horizon, even with the UK economy looking set to slow significantly.
Prospect of Major UK Slowdown Set to Limit Pound Upside
Growing anxiety over the outlook of the UK economy could see GBP exchange rates struggling to hold onto any positive trend for long, though.
Thanks to the major negative impact of the Covid-19 shutdown investors expect to see a marked deterioration in growth in March’s data, dragging the first quarter growth rate sharply lower.
Commenting on today’s growth data, Howard Archer, chief economic advisor at EY ITEM Club, noted:
‘The economy obviously took a very substantial hit in March as the coronavirus outbreak increasingly impacted, with mounting restrictions on people’s movements and business activity, culminating in the lockdown on 23 March.
‘EY ITEM Club suspects the UK economy saw a substantial contraction in March (possibly up to 5%), resulting in GDP contraction of around 1.3% in the first quarter.’
With fresh UK economic data thin on the ground over the coming week this could keep the GBP/USD exchange rate from staging any major gains.
Another Sharp Increase in Jobless Claims Forecast to Dent US Dollar
Support for the US Dollar (USD) weakened, meanwhile, as markets braced for the release of the latest set of US initial jobless claims.
After the major 6.6 million increase seen last week USD exchange rates have been left biased to the downside as investors bet on another sharp uptick in unemployment.
If claims rise by another 5 million as forecast this could see USD exchange rates falter as evidence mounts of the US labour market experiencing its weakest period in history.
As long as the US unemployment rate appears on track to reach record highs in the first half of 2020 the US Dollar may struggle to find any particular support against its rivals.
Softer US Inflation May Add to USD Exchange Rate Weakness
While markets are set to close for the extended bank holiday weekend the US Dollar could still come under fresh pressure with the release of March’s US consumer price index data.
Investors expect to see a fresh dip in inflationary pressure on both the month and the year, highlighting the troubles facing the world’s largest economy in the midst of the Covid-19 pandemic.
As the consumer price index is not the Federal Reserve’s preferred gauge of inflation, though, the impact of the data could prove limited.
Any renewed sense of market risk aversion could also help to shore up USD exchange rates in the days ahead as markets remain wary of the prospect of an imminent global recession.