Renewed market anxiety over Covid-19 and bets on a larger US fiscal stimulus package knocked the GBP/USD exchange rate off its positive footing.
Last Week: US Dollar Shakes off Shock Payrolls Decline
Although December’s non-farm payrolls report showed a surprise decline on the month, indicating that the US economy had shed 140,000 jobs at the end of the year, this failed to weigh down the US Dollar for long.
While confidence in the outlook of the US labour market continued to weaken this underwhelming performance increased the odds of president-elect Joe Biden implementing greater fiscal stimulus measures in the near future.
As the UK service sector remained in a state of contraction in December this left investors with limited incentive to favour the Pound, meanwhile.
With global market sentiment weakening in the face of the latest wave of Covid-19 infections the appeal of the safe-haven US Dollar generally started to improve once again.
Three Things to Watch out for This Week
1. US Inflation Rate
The mood towards the US Dollar could improve further on Wednesday with the release of December’s inflation rate.
If the headline inflation figure rises from 1.2% to 1.3% as forecast this would offer the Federal Reserve greater cause for optimism, fuelling bets that monetary policy could tighten in the months ahead.
2. US Initial Jobless Claims
A smaller weekly increase in initial jobless claims may give USD exchange rates an additional rallying point, meanwhile.
As long as the labour market shows evidence of stabilising in the early weeks of the year this could limit worries over the wider outlook of the US economy, shoring up the US Dollar.
3. UK Gross Domestic Product
November’s US gross domestic product data looks set to put further pressure on the GBP/USD exchange rate, with forecasts pointing towards a sharp monthly contraction.
Evidence that growth weakened significantly in the face of the second national lockdown would give investors fresh reason to sell out of the Pound as the odds of a double-dip recession increase.
As long as US inflation and jobless claims data shows signs of improvement this could see the GBP/USD exchange rate shedding further ground over the course of the week.