The sterling vs US dollar interbank exchange rate rose early this week, partly because investors are wary of the rising possibility of a US recession in the foreseeable future, while the Federal Reserve may cut US interest rates further.

The buck has lost out as the prospect of a truce in the US/China trade war encourages money managers to buy assets beyond the “safe haven” US dollar.

Investors weigh odds of US recession this year or next

The GBP to USD interbank exchange rate initially gained this week, partly because markets are increasingly factoring in the possibility of a US recession in 2020/1. After all, America’s current economic expansion is already the longest in the country’s history, at 126 months.

This leads some investors to think it’s unlikely that the USA’s Gross Domestic Product (GDP) will expand forever. So they seek to protect themselves against this possibility by selling the US dollar, thereby weakening its value.

To preserve the USA’s economic expansion, the Federal Reserve may cut interest rates below their current 1.5%-1.75% this year, which traditionally weighs down the US dollar too.

Continuing tensions between the US and China likely to impact USD

US/China to formally sign trade agreement in coming weeks

In addition, another factor that’s weighed on the US dollar is that the USA and China look set to formally sign their trade truce sometime in January.

Last month, the world’s two largest economies announced a “first phase” reprieve to their trade war, which over the last 18 months has weakened both their GDP expansions. In particular, Washington will cut its tariffs on billions in Chinese imports to the USA, while Beijing has pledged to buy more US farm goods like soy.

However, this announcement tends to weaken the US dollar, by encouraging the world’s investors to sell the “safe haven” buck, in favour of so-called “riskier” assets elsewhere.

Turning to next week, important US economic data includes Tuesday 7th’s ISM non-manufacturing data for December, and Friday 10th’s unemployment statistics for last month. Both these releases could affect the greenback, if they arrive above or below forecasts.

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