Pound US Dollar (GBP/USD) Exchange Rate Benefits from $900 Billion US Fiscal Stimulus Announcement

Increased Market Optimism Sees Pound US Dollar (GBP/USD) Exchange Rate Trending Higher

With market risk appetite elevated by the agreement of a UK-EU trade deal and US fiscal stimulus the Pound to US Dollar (GBP/USD) exchange rate found some support.

As safe-haven demand generally diminished in the face of reduced uncertainty the US Dollar (USD) fell out of favour with investors.

Although the $900 billion stimulus spending package looks set to offer a boost to the flagging US economy this failed to encourage USD exchange rate gains, given the prevailing mood of investor optimism.

Even so, as the relief that greeted the UK-EU trade deal news faded over the bank holiday this limited the potential for fresh Pound Sterling (GBP) gains today.

Lingering Uncertainty over UK Economic Outlook Limits Pound Appeal

While the risk of a no-deal Brexit scenario is no longer on the table the potential for substantial economic disruption remains, to the detriment of GBP exchange rates.

With many businesses still appearing unprepared for the end of the Brexit transition period at the end of December markets remain wary of fresh damage to come.

Uncertainty over the details concerning the future trade of the financial services sector also put a dampener on the Pound, given that the sector accounts for a significant portion of the UK gross domestic product.

As tightened Covid-19 restrictions also appear set to weigh on economic growth in the coming weeks there appeared little room for Pound gains at this stage.

USD Exchange Rates Vulnerable to Widened Advance Goods Trade Deficit

However, the GBP/USD exchange rate may gain further traction on Wednesday with the release of November’s US advance goods trade balance figure.

Forecasts point towards the goods deficit widening from -$80.4 billion to -$83 billion last month, reflecting a continued deterioration in US trade conditions.

A widened deficit could give investors fresh incentive to sell out of the US Dollar, adding to the general sense of market risk appetite.

With trade conditions appearing unlikely to experience a major turnaround in the near future, given the ongoing impact of the Covid-19 crisis, a negative showing here could weigh heavily on USD exchange rates.

Fresh Jobless Claims Uptick Set to Weigh on US Dollar

Another major source of US Dollar volatility in the final trading week of the year looks set to come on the back of the latest jobless claims data.

If the initial jobless claims figure shows another weekly uptick this could offer the GBP/USD exchange rate a fresh boost.

As long as the US labour market continues to show signs of weakness in the face of Covid-19 disruption support for the US Dollar appears unlikely to return.

Although the agreed fiscal stimulus package could help to stem the impact of rising unemployment in the early months of 2021 any fresh increase in jobless claims could still put significant pressure on USD exchange rates this week.

Louisa Heath

Contact Louisa Heath