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GBP/USD Exchange Rate Firms as UK Unemployment Falls

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Pound US Dollar (GBP/USD) Exchange Rate Ticks Higher as UK Unemployment Drops

The Pound Euro (GBP/EUR) exchange rate firmed on Tuesday to recover some of the pairing’s early week losses ahead of the Bank of England (BoE) and Federal Reserve monetary policy decisions this week.

An improving market mood and upbeat UK employment data have supported the Pound, although the threat of tighter UK restrictions is limiting Sterling’s gains.

Pound (GBP) Supported by Upbeat UK Job Data

The Pound (GBP) firmed on Tuesday following the release of UK jobs data that showed the unemployment rate fell to 4.2% in the three months to October, down from 4.3% in September’s reading.

Analysts had been concerned over the impact of the furlough scheme ending on UK employment, but so far the figures have instead indicated a recovering jobs market.

While the Office for National Statistics (ONS) said some furloughed workers may be working their notice periods, signs suggest the impact will be limited.

The director of economic statistics at the ONS, Darren Morgan, said:

“With still no sign of the end of the furlough scheme hitting the number of jobs, the total of employees on payroll continued to grow strongly in November, although it could include people recently made redundant but still working out their notice.”

Meanwhile, as expectations for a rate hike from the BoE at its December policy meeting on Thursday have drastically weakened due to renewed UK restrictions, the threat of tighter Covid measures, and the emergence of the Omicron variant, the GBP/USD exchange rate may struggle to make significant gains.

Forecasts pointing to inflation having soared to 4.7% in November, and slowing activity in the manufacturing and services PMIs may limit Sterling’s upside.

The risk posed by stricter UK restrictions, amid the spread of the Omicron variant, and the impact on UK economic activity also threatens to limit GBP exchange rates.

US Dollar (USD) Dips as Safe-Haven Demand Declines

The US Dollar (USD) weakened during Tuesday’s session as increased market risk appetite weighed on safe-haven demand for the currency.

News that a real-world study in South Africa found two doses of the Pfizer / BioNTech vaccine provided 70% protection against hospitalisation, and 33% against infection lifted risk appetite on hopes the impact on global economic recovery may not be as severe as first feared.

However, the findings are only preliminary and represent a drop from 90% protection against hospitalisation from the Delta coronavirus variant.

The US Dollar may come under further pressure tomorrow with US retail sales forecast to have slowed in November at 0.8%, down from 1.7% in October.

Weakness in USD exchange rates look set to be short-lived, however, as the Federal Reserve is widely expected to announce an acceleration of tapering its bond-buying programme to pave the way for interest rate hikes in 2022.

With the policy gap expected to widen between the Federal Reserve and other major central banks, such as the European Central Bank (ECB) and BoE, the US Dollar may climb later in the week.