Pound US Dollar (GBP/USD) Exchange Rate Slumps as US Deficit Hits 3-Year Low

January 7, 2020 – Written by Frank Davies

Narrowed US Trade Deficit Drags Pound Sterling US Dollar (GBP/USD) Exchange Rate Lower

A sharper-than-expected narrowing of the US trade deficit saw the Pound Sterling to US Dollar (GBP/USD) exchange rate slip on Tuesday.

While forecasts had pointed towards an improvement in US trade investors were still impressed to find that the deficit had shrunk to its lowest level since October 2016.

Although some of narrowing was likely the result of temporary factors, such as the unwinding of stockpiles made ahead of the imposition of fresh Chinese tariffs in September, this failed to limit the bullishness of the US Dollar.

With market risk appetite still subdued thanks to worries over the deterioration in trade relations between the US and Iran USD exchange rates remained on a strong uptrend across the board.

Lingering Risk of Global Trade Disruption Set to Shore up US Dollar

As long as markets see reason to fear the prospect of a further disruption in global trade the US Dollar looks set to hold onto a positive footing.

The increased risk of fresh conflict within the Middle East could keep the appeal of the safe-haven USD elevated in the days ahead, with investors wary of the possibility of a further escalation.

Unless the two sides appear prepared to deescalate the situation this is likely to limit the potential for GBP/USD exchange rate gains for the foreseeable future.

As long as markets see reason to fear another slowdown in global growth the US Dollar is likely to benefit.

GBP/USD Exchange Rate Looks for Boost on Improved UK Labour Productivity

Support for the Pound could pick up on Wednesday, however, if the final third quarter labour productivity index confirms a solid uptick.

Evidence that the UK economy recovered some of its lost productivity even in the face of persistent Brexit-based anxiety may offer GBP exchange rates a strong rallying point.

If the economy can demonstrate greater signs of resilience the downside potential of the Pound could diminish, given the lower perceived risk of a potential recession.

However, if productivity is revised lower this would expose the GBP/USD exchange rate to fresh selling pressure.

Solid Non-Farm Payrolls Forecast to Add to USD Exchange Rate Bullishness

Ahead of the weekend, the US Dollar could find additional strength against its rivals if December’s non-farm payrolls report impresses investors.

Any indication that the US labour market continued to tighten in the final month of 2019 would pave the way for USD exchange rates to push higher on Friday.

However, a disappointing payrolls figure may encourage investors to sell out of the US Dollar in a bout of profit taking.

A stronger month of wage growth could also see the GBP/USD exchange rate slip further as the case for further Federal Reserve dovishness continues to retreat.

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TAGS: Pound Dollar Forecasts