GBP/USD Exchange Rate Hits 32-Month High as Brexit Uncertainty Evaporates

As the impact of the last-minute UK-EU trade deal began to fade the GBP/USD exchange rate failed to hold onto its earlier traction, retreating from the 32-month high hit ahead of the New Year.

Last Week: Eleventh Hour UK-EU Deal Improves Pound Appeal

With the UK narrowly avoiding the threat of a no-deal Brexit scenario investors found reason to favour the Pound against its rivals in the days between Christmas and the end of 2020.

However, with the end of the Brexit transition period still representing a threat of fresh economic disruption to the struggling UK economy this boost ultimately proved short-lived in nature.

Although December’s UK manufacturing PMI rose to its highest level since November 2017 this was not enough to give the GBP/USD exchange rate a fresh boost.

Support for the US Dollar generally weakened in the final trading days of 2020 as optimism over the rollout of Covid-19 vaccines and US fiscal stimulus encouraged a sense of market risk appetite.

Three Things to Watch out for This Week

1. UK Services PMI

If December’s finalised UK services PMI confirms that the sector remained in a state of slowdown at the end of the year this may put a fresh dampener on GBP exchange rates.

As long as signs continue to point towards a loss of momentum within the UK economy’s main source of growth worries over the wider outlook look set to rise, to the detriment of the Pound.

2. US Balance of Trade

With forecasts pointing towards the US trade deficit widening further in November the mood towards the US Dollar appears set to sour further this week.

Evidence that trade conditions continued to deteriorate could encourage bets that the world’s largest economy may struggle to deliver a solid fourth quarter gross domestic product, weighing on USD exchange rates.

3. US Non-Farm Payrolls

Worries over the health of the US economy and its response to the Covid-19 crisis could pick up further on Friday with the release of the latest non-farm payrolls report.

If joblessness shows further signs of picking up over the course of December the GBP/USD exchange rate may find a fresh leg up, given existing anxiety over the deterioration of the US labour market.

GBP/USD Outlook

Weaker US trade and payrolls figures could help the GBP/USD exchange rate to continue trending in the region of its 32-month high.

Louisa Heath

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