Pound US Dollar (GBP/USD) Exchange Rate Weighed Down by Brexit Uncertainty
Confusion over Brexit kept the Pound to US Dollar (GBP/USD) exchange rate under pressure ahead of the weekend, with markets concerned by a lack of tangible progress towards an agreement.
As Prime Minister Theresa May was quick to contradict reports that the UK could remain in the customs union beyond 2021, in order to avoid a hard Irish border, this left the Pound (GBP) on a weaker footing.
Comments from Irish Prime Minister Leo Varadkar prompted further jitters for GBP exchange rates as he warned that unless there is substantial progress in Brexit negotiations by June there is a risk of the UK failing to secure a withdrawal agreement.
Naturally this prospect encouraged investors to pile out of the Pound ahead of the weekend.
Hawkish Fed Minutes Set to Dent GBP/USD Exchange Rate
While commentary from Federal Reserve policymakers shed little light on the policy outlook this still left the Pound to US Dollar (GBP/USD) exchange rate on a weaker footing.
Markets remain confident that the Fed will pursue a more aggressive pace of monetary tightening over the coming months, potentially raising interest rates three more times before the end of the year.
This has limited the downside potential of US Dollar (USD) exchange rates, especially as the general sense of market risk appetite has remained muted.
A hawkish set of Federal Open Market Committee (FOMC) meeting minutes could offer further support to the US Dollar next week.
If the tone of policymakers proves more hawkish than not investors are likely to up their bets on the odds of the Fed raising interest rates again sooner rather than later.
However, any signs that the central bank could be taking a more measured approach would leave USD exchange rates vulnerable.
Pound US Dollar (GBP/USD) Exchange Rate Rally Forecast on Higher UK Inflation
Wednesday’s UK consumer price index data may offer a rallying point to the Pound to US Dollar (GBP/USD) exchange rate.
As forecasts point towards an uptick in inflationary pressure on the month this may give the Bank of England (BoE) greater cause for confidence.
A fresh increase in inflation would improve the case for a summer interest rate hike, to the benefit of GBP exchange rates.
Even so, lingering uncertainty over Brexit may weigh on the minds of policymakers in spite of stronger domestic data.
As James Smith, Developed Markets Economist at ING, commented:
‘Talks are currently centred on resolving the Irish border conundrum, and so far UK ministers remain divided on which customs model to pursue.
‘Admittedly, we doubt that the Brexit headlines over the next few weeks will make much of a difference to the odds of a summer rate rise. Having said that, policymakers will be aware that it could get increasingly challenging to hike rates later this year as Brexit noise increases before the UK formally leaves the EU in 2019. Depending on how the economy performs before August, policymakers may want to capitalise while they still can.’
If the UK and EU show signs of progressing towards an agreement on outstanding issues such as the Irish border, though, the Pound to US Dollar (GBP/USD) exchange rate is likely to return to a stronger footing.