GBP/USD: Horrible UK GDP and Brexit hassles pounds the pound

The downfall in UK output and Brexit issues suggest sterling may extend its slump while some troubles are brewing in America, Yohay Elam, an analyst at FXStreet, reports.

Read: UK GDP shrinks -20.4% MoM in April vs. -18.4% expected, GBP/USD unfazed

Key quotes

“The UK economy contracted by 20.4% in April, worse than expected, and a horrible figure in absolute terms. Manufacturing output collapsed by 24.3%, a considerable miss in comparison to around 15% projected. The GDP figures have weighed on sterling and may have a longer effect as forecasts are downgraded for the second quarter and the full year.”

“The pound has been pounded by Brexit. While both sides agreed to intensify talks, London will formally tell Brussels that it is unwilling to extend the transition period beyond year-end. If negotiations are not fruitful, Britain will fall back to unfavorable World Trade Organization terms in 2021. Mutual accusations about the gridlock have been weighing on sterling.”

“Markets have finally taken note of a second wave of coronavirus as an official in Houston said the city is on the ‘precipice of disaster’ and as a football stadium is being readied for use as a makeshift hospital. Treasury Secretary Steven Mnuchin said the US will not lock down the economy and claimed testing and tracing capacity has improved.” 

“COVID-19 concerns come on top of pessimism from the Federal Reserve, which sees a return to pre-pandemic output not before 2022. Investors seem unconvinced by the bank's unequivocal commitment to support the economy.”