GBP to USD Exchange Rate Plummets as Military Action Leaves Investors Piling into Safe Havens

January 3, 2020 – Written by James Fuller

A combination of limp market demand for the Pound, as well as a surge in safe haven demand, have knocked the British Pound to US Dollar (GBP/USD) exchange rate down before markets close for the week. A US air strike in Iraq took place overnight and has caused a surge in global geopolitical jitters. These fresh uncertainties have led to stronger demand for safe haven correlated currencies, such as the US Dollar.

Since opening this week at the level of 1.3081, GBP/USD has seen hugely volatile movement. GBP/USD rocketed higher and touched on a half month high of 1.3279 before the end of 2019.

Since the beginning of 2020 though, GBP/USD has been tumbling back from those highs. A jump in demand for the US Dollar as a safe haven pushed GBP/USD back down below its opening levels today, and at the time of writing GBP/USD is trending near the level of 1.3070.

GBP Exchange Rates Lack Support as UK Data Continues to Disappoint

Investors have had little reason to make big moves on the Pound this week, amid a lack of significant news or developments in UK politics or economy.

Sterling advanced at the beginning of the week, as investors bought it from recent cheap lows at the end of 2019. This gain was boosted by late-2019 losses in the US Dollar.

However, since the turn of the year, Brexit jitters have persisted and US Dollar demand has risen again.

With Britain set to leave the EU at the end of January and begin a 2020 filled with transition period negotiations, demand for the Pound is limited.

On top of Brexit uncertainties, the Pound outlook is being limited by poor UK ecostats worsening market concerns about Britain’s economic outlook.

Today’s UK construction PMI from Markit printed an even deeper than forecast contraction of 44.4. According to Tim Moore, Economics Associate Director at IHS Markit:

‘December data suggested that the UK construction sector limped through the final quarter of 2019, with output falling in all three major categories of work. Brexit uncertainty and spending delays ahead of the General Election were once again the most commonly cited factors highlighted by firms experiencing a drop in construction activity.’

Combined with yesterday’s poor UK manufacturing results, the data indicated that political uncertainty hit Britain’s economic activity worse than expected towards the end of 2019.

USD Exchange Rates Jump on Safe Haven Demand but Gains Limited

The US Dollar was one of Friday’s best performing major currencies, as it benefitted from a sudden surge in safe haven demand.

US President Donald Trump ordered an air strike on a Baghdad airport, killing Iranian Major-General Qassem Soleimani.

Analysts expect that the attack will lead to retaliation from Iran. Expectation for further military escalation has caused fresh market panic, causing investors to pile into the safe haven US Dollar.

This has been the primary cause of US Dollar strength today. However, while the US Dollar benefits from geopolitics analysts still predict the US Dollar will be weaker overall this year.

Global growth has shown signs of recovery. According to Thierry Wizman, Global Interest Rates and Currencies Strategist at Macquarie Group:

‘We think the trend is still towards a weaker Dollar against the majors overall in 2020. That’s supported in part by the view that global growth will resume and that’s going to be good for the non-dollar blocs,’

GBP/USD Exchange Rate Forecast: US Economic Speculation Could Return to Focus

For now, investors will be closely watching US-Iran military tensions for possible escalation. If there are signs of further military action, the safe haven US Dollar could be in for fresh demand.

However, that aside the Pound to US Dollar exchange rate could take more of a focus on the US economic outlook again over the coming week.

This afternoon’s US manufacturing PMI data from ISM, and this evening’s Federal Reserve meeting minutes, could both be highly influential if they surprise investors.

Poor data or a more cautious Fed could lead to Fed interest rate cut bets, which would put pressure on the US Dollar.

Looking ahead to next week, upcoming US data may continue to prove influential.

US non-manufacturing PMI data will come in earlier in the week, with job stats including key Non-Farm Payrolls towards the end of the week.

While Britain’s economic calendar will be relatively quiet, the Pound to US Dollar exchange rate will continue to be driven by Brexit developments as well.

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TAGS: Pound Dollar Forecasts