The Pound US Dollar exchange rate has dropped in recent sessions. While market anticipation for progress in Brexit negotiations has limited the Pound’s losses, the US Dollar has benefitted from hopes for US tax plans as well as speculation that the Federal Reserve could become more hawkish in 2018.
GBP USD opened this week at the level of 1.3474 and has fluctuated widely since then. On Tuesday the pair fell and touched a low of 1.3374. The pair touched lows of 1.33 again on Wednesday morning.
Pound (GBP) Investors Anticipate Brexit Developments
The Pound has seen volatile movement in recent sessions due to market anxiety about the Brexit process.
While UK and EU negotiators appeared close to agreeing a deal on the Brexit divorce proceedings on Monday this week, a spanner was thrown in the works as Northern Ireland’s DUP Party disagreed with the UK government’s proposal for the Irish border.
The UK government proposed that Northern Ireland could maintain a soft border with Ireland if NI continued to follow EU rules post-Brexit.
However, the DUP Party, which is currently allied with UK Prime Minister Theresa May’s Conservative Party, objected to the idea of Northern Ireland being treated differently to the rest of Britain.
Britain’s economic outlook is mixed too, as recent UK services stats have failed to meet expectations. Markit’s UK services PMI from November only came in at 53.8, falling short of the forecast 55.0.
Overall though, analysts and investors are still confident that the UK and EU will be able to reach an agreement on the Irish border within the coming week, before the EU summit on the 14th of December.
Brexit talks are unsurprisingly expected to remain a big focus for the Pound outlook in 2018 too, but whether or not progress is made in December could have a big impact on the British currency.
According to analysts from Capital Economics;
‘Sterling’s slide against the Dollar since Monday afternoon – after a meeting between Prime Minister May and European Commission President Juncker failed to produce a breakthrough in Brexit negotiations – raises the question of how the talks will influence the exchange rate in the coming quarters,’
Friday will see the publication of Britain’s October trade balance and production stats, but markets will remain focused on the Brexit process.
If UK and EU negotiators come to an agreement on the Irish border by the end of this week, Sterling is likely to soar and analysts expect that UK-EU trade talks will be unlocked in the coming months.
However, if no deal is reached by next week markets will become increasingly anxious.
If the Irish border issue keeps talks stuck until after the EU summit on the 14th, it’s possible that further negotiations could be delayed into the New Year and this would cause ‘hard Brexit’ concerns to worsen. In this scenario, the Pound would plummet.
US Dollar (USD) Strength Limited by US Political Uncertainties
The US Dollar has seen support in recent sessions, amid market hopes that the US Republican Party’s plans for tax reform could see success in Congress.
As the US tax bill has passed major obstacles, investors are increasingly hopeful that the tax changes will be passed and will offer a boost to US corporations.
However, the US Dollar’s appeal has been weighed on by mixed US ecostats, as well as political concerns amid fresh developments in the Trump-Russia investigation.
Tuesday’s American session saw the publication of US trade balance data from October, as well as non-manufacturing PMIs for November.
October’s US trade deficit came in even worse-than-expected, at $-48.7b.
Non-manufacturing PMIs from Markit and ISM both fell short of expectations too. Markit’s services PMI came in at 54.5, below the forecast 55.4, while ISM’s non-manufacturing PMI slipped from 60.1 to 57.4 rather than coming in at the forecast 59.0.
Investors were also anxious about fresh developments into the investigation of the 2016 Trump campaign’s potential connections to Russia.
The Trump-Russia story is likely to continue to hit headlines in the coming year, and if any connections are made to US President Donald Trump it could cause mass market uncertainty.
Key US data could continue to drive the US Dollar’s movement for the remainder of this week. November’s US Non-Farm Payroll report will be published on Friday.
If the data beats expectations, investors may become increasingly confident that the Federal Reserve will maintain a hawkish tone next year.
GBP USD Interbank Rate
At the time of writing this article, the Pound US Dollar exchange rate trended in the region of 1.3377. The US Dollar to Pound exchange rate traded at around 0.7475.