Pound US Dollar Exchange Rate Slips from 32-Month High as Market Optimism Fades

A general sense of market risk appetite helped to push the Pound US Dollar exchange rate to a 32-month high, although this was soon dented by fresh signs of a UK slowdown.

Last Week: Inauguration optimism weighs heavily on US dollar demand

In the wake of Joe Biden’s inauguration as US president the appeal of the US Dollar proved limited as the general sense of market optimism picked up.

This helped to drive the GBP/USD exchange rate to its highest level since May 2018 ahead of the weekend.

However, as January’s UK services PMI experienced a deeper plunge into contraction territory than forecast this saw the pound fall out of favour on Friday.

With the month’s US manufacturing and services PMIs proving resilient in nature the GBP/USD exchange rate was left on the back foot, reversing some of the week’s earlier gains.

Three Things to Watch out for This Week

1. UK Unemployment Rate

The Pound US Dollar exchange rate could extend its downtrend further on Tuesday if the UK unemployment rate picks up as forecast.

Confirmation that the labour market weakened further in November would add to existing doubts over the outlook of the economy, weighing down the pound against its rivals.

2. Federal Open Market Committee Rate Decision

While markets do not expect to see any policy change at the Federal Reserve’s latest announcement the US dollar could still experience volatility on the day.

If Fed policymakers express any increased anxiety over the health of the US economy and its likely recovery from the Covid-19 crisis this may leave USD exchange rates on the back foot.

3. US Durable Goods Orders

As forecasts point towards a steady monthly reading from December’s durable goods orders figure this may offer the US dollar a rallying point.

Evidence of the world’s largest economy holding up even in the face of increasing pandemic pressures may prompt the GBP/USD exchange rate to shed fresh ground.

GBP/USD Outlook

Evidence of further weakness within the UK economy could help to drive the Pound US Dollar exchange rate further away from its recent highs, unless the Fed proves more dovish than expected.