Weekly Update: Pound US Dollar Exchange Rate Falls from 32-Month High as Markets Await Fed Decision

GBP/EUR – Smaller Uptick in UK Unemployment Supports Pound

As November’s UK unemployment rate saw a more limited uptick than markets had anticipated, this helped to keep a floor under GBP exchange rates.

Investors also took encouragement from a sharp uptick in the corresponding average earnings figures, which suggest that workers were better off financially in spite of the second national lockdown.

With fresh UK data releases a little thin on the ground for the remainder of the week, though, the Pound could struggle for direction.

GBP investors will likely focus on UK coronavirus developments through the rest of this week’s session, with further progress in the UK’s vaccination rollout potentially tempering any Pound weakness.

 

GBP/USD – Weak Services PMI Casts Doubt over UK Economic Outlook

Confidence in the UK economy took a significant blow ahead of last weekend thanks to the weakness of January’s services PMI.

As the index unexpectedly plunged from 49.4 to 38.8, showing a sharp monthly contraction for the sector, fears of an impending negative first quarter growth rate weighed heavily on market sentiment.

Any fresh developments surrounding the Covid-19 pandemic and the ongoing national lockdown could put a dampener on the Pound in the days ahead.

If the government shows signs of keeping tighter social restrictions in place for longer, the Pound looks set to weaken on the prospect of an extended period of economic weakness.

 

USD/GBP – US Dollar Recovers Ground as Market Risk Appetite Fades

With market optimism starting to fade in the wake of Joe Biden’s inauguration as US president, the US Dollar was able to recover some of its lost ground.

A smaller-than-expected increase in the latest initial jobless claims figure also helped to shore up USD exchange rates, in spite of lingering anxiety over the health of the US labour market.

However, this evening’s Federal Open Market Committee policy announcement could prompt fresh volatility for the US Dollar.

The Fed is expected to maintain monetary policy, but any indications and insight for future policy could drive USD movement, especially if they indicate support for President Biden’s fiscal stimulus.

As long as the Fed looks set to keep monetary policy looser for longer, the potential for any USD exchange rate gains appears limited.

 

EUR/USD – Weakening German Confidence Weighs on Euro Appeal

As the German GfK consumer confidence index fell far deeper into negative territory than forecast for February, the Euro was left on the back foot against its rivals.

With both consumer and business sentiment within the Eurozone’s powerhouse economy showing fresh signs of weakness, EUR exchange rates came under pressure.

This diminished the impact of last week’s European Central Bank (ECB) announcement, with policymakers lack of action having initially boosted the appeal of the Euro.

A rallying point could be in store for the single currency, however, if the German inflation rate turns positive in January as anticipated.

Evidence that inflationary pressure started to pick back up at the start of 2021 would give the ECB greater cause for confidence, shoring up EUR exchange rates.

Louisa Heath

Contact Louisa Heath


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