Mounting anxiety over the possibility of fresh Covid-19 restrictions are weighing heavily on the GBP/USD exchange rate at the start of this week amid fears of further economic disruption.
Last Week: Pound to US Dollar Crumbles as BoE Discusses Negative Interest Rates
The Pound’s bullish recovery run came to an end towards the end of last week after the Bank of England’s (BoE) policy decision left interest rates unchanged at 0.1%, offering little surprise to markets.
However, the revelation that policymakers had discussed negative interest rates, even if only theoretically, saw GBP exchange rates trending sharply lower across the board.
A lack of action from the Federal Reserve, meanwhile, spurred the US Dollar to push higher against its rivals as policymakers failed to hint at any imminent policy action to come.
While political tensions in the US showed signs of picking up, this was overshadowed by the general deterioration in global market confidence, boosting the US Dollar with safe-haven demand.
Three Things to Watch Out for This Week
- Coronavirus Restrictions
While UK-EU Brexit talks resume this week and will continue driving GBP movement, the alarming rise of coronavirus cases in the UK and Europe is weighing heavily on market sentiment and on the Pound to US Dollar exchange rate.
This will likely continue putting the Pound under pressure through the rest of the week as the threat of coronavirus restrictions drag on the GBP/USD exchange rate and boosts the safe-haven US Dollar.
- UK and US Manufacturing and Services PMIs
Confidence in the underlying health of the UK economy could falter if September’s services PMI weakens on the month, pointing towards a slowdown in growth momentum.
As the service sector remains the primary growth engine of the UK economy a weaker performance here would raise the risk of a disappointing third quarter gross domestic product reading.
Meanwhile, the PMIs will provide an insight into the US economic recovery, which is forecast to show growth stalled in September.
- US Durable Goods Orders
The strength of the US Dollar may falter, though, if growth in durable goods orders slows from 11.2% to 1.5% in August as anticipated.
Fresh evidence of the pressure that the US economy faces could dampen the appeal of the US Dollar, even in the midst of a decline in wider market confidence.
GBP/USD Exchange Rate Outlook
As the UK economy looks set to face further disruption and UK-EU trade talks resume, any softness in the latest data could see the Pound to US Dollar exchange rate extending its recent slide.
Added to this, souring risk sentiment on the threat of a second wave of coronavirus in the UK, and deadlock looking likely in Congress over the next round of US coronavirus stimulus, is likely to strengthen safe-haven US Dollar demand.