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EU Summit could Trigger GBP/USD Rally on ‘Phase Two’ Approval

The Pound has dropped back against the US Dollar on Thursday afternoon, following a so-so Bank of England (BoE) interest rate decision.

The GBP/USD exchange rate opened in the region of 1.3452 on 14th December, but has since dipped to 1.3428.

The BoE left interest rates at 0% as forecast, while its minutes were described as ‘fairly dull’ by Ben Brettel of Hargreaves Lansdown.

Brettel gave a cautious forecast for timing of the next BoE interest rate hike, stating;

‘With domestic inflationary pressures thin on the ground and Brexit casting its customary shadow, there’s no real imperative to move for some time.

Markets are tentatively pricing in a further rise towards the second half of next year’.

(First published December 14th, 2017)

The Pound has advanced against the US Dollar recently, thanks to better-than-expected retail sales figures for November.

Looking ahead, however, the Pound may face extreme turbulence depending on the outcome of an EU summit on 15th December.

EU Approval of UK Brexit Progress could cause GBP/USD Rate Rally

The Pound could turn volatile on Friday, depending on the attitudes of EU leaders at a two-day summit.

While not set in stone, it is generally expected that EU leaders will end up approving of UK progress in Brexit talks so far.

This outcome is supported by the official agenda for the EU summit, which says;

‘[EU] leaders are expected to adopt the draft guidelines to move to the second phase of Brexit negotiations.

This follows the confirmation from Michel Barnier, the EU Chief Negotiator, that sufficient progress has been made during the first phase of negotiations’.

Approval from the EU leaders might cause a swell of confidence in the Pound, as the ‘second phase’ covers important discussions like UK-EU trade deals.

UK negotiators have long sought to start discussing post-Brexit trade as soon as possible, so success tomorrow may come as a great relief among GBP traders.

If, on the other hand, the UK is not deemed to have done enough to allow progression in talks, the Pound could tumble against the US Dollar.

US Dollar to Pound Rate may Decline if Tax Reform Plans Fall Short

The US Dollar has been supported recently by a Federal Reserve interest rate hike, but this has failed to translate to a US Dollar to Pound rate rise.

While the rate hike has pleased USD traders, the Fed has also acted as a limiting factor because of tax-related scepticism.

Current Fed Chair Janet Yellen, who will be departing in 2018, has voiced her uncertainty about how beneficial planned tax reforms will actually be.

In a speech following the rate decision announcement, Yellen said;

‘While changes in tax policy will likely provide some lift to economic activity, the magnitude and timing of the macroeconomic effects of any tax package remain uncertain’.

Having just suffered a staggering defeat in the Alabama special election, the Republican Party is relying on tax changes to increase its credibility.

If these sweeping changes fall flat when (and if) they are introduced, the US Dollar could drop sharply against the Pound.

Recent Interbank GBP USD Exchange Rates

At the time of writing, the Pound to US Dollar (GBP USD) exchange rate was trading at 1.3452 and the US Dollar to Pound (USD GBP) exchange rate was trading at 0.7434.