Pound to Dollar Rates Dragged Lower by Dollar Strength

GBP USD Exchange Rate Slides after GDP Data Shows British Economy Shrank in June 

The dollar ended last week full of verve as weak domestic data boosted demand for the safe-haven currency. Friday’s figures highlighted the ongoing damage the Covid-19 pandemic is inflicting on the economy, dragging US Treasury yields lower – and the pound to dollar rate with it as investors turned more risk-averse.

US retail sales declined for a third straight month in December. Consumer spending was strangled by job losses and renewed measures to slow a surge in Covid-19 infections – further evidence that the economy applied the brakes at the end of 2020. The Commerce Department revealed that this measure of purchases at stores, restaurants and online, declined a seasonally adjusted 0.7% in December from November.

US consumer sentiment also dipped in recent weeks – having been forecast by economists to hold steady – as the Covid-19 crisis weighed on the economic outlook. The University of Michigan’s index fell to 79.2 early in January from a final reading of 80.7 in December.

On Thursday, President-elect Joe Biden kept his election pledge to take the pandemic more seriously than Donald Trump by proposing a $1.9tn (£1.4tn) package to ease the economic harm it has caused. It adds significant weight to the $982 billion relief bill passed in December – more than tripling the funds allocated for vaccine distribution. Stimulus package expectations have subdued the safe-haven dollar so far in 2021; however, the announcement didn’t dent the dollar any further after Mr Biden didn’t spring any surprises.

Double-dip recession looms for the UK economy

Disappointing data across the pond also dealt a blow to the pound vs dollar rate on Friday. UK gross domestic product fell by 2.6% month-on-month in November when tougher controls across the UK to combat rapid growth in Covid infections weighed on economic growth. Reflecting the renewed lockdown restrictions amid the second wave of the pandemic, the latest official figures indicate that the UK economy has edged towards a double-dip recession.

Meanwhile, the latest production data points towards a gradually diminishing recovery in the UK’s industrial sector in November.

Looking ahead

A barren calendar awaits in the US today because of a national holiday to celebrate the birth of Martin Luther King. The key driver for the dollar this week takes place on Wednesday when Joe Biden is sworn in as the 46th US president. Having already announced his massive stimulus package, investors will be intrigued to hear what else he has in store for the US economy.

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