Pound to US Dollar Exchange Rate Jumps to Weekly High despite Safe Haven Demand
Broad appeal for safe havens like the US Dollar (USD) throughout global markets didn’t prevent the Pound Sterling to US Dollar (GBP/USD) exchange rate from jumping during Tuesday’s European session. USD investors became more anxious ahead of Wednesday’s Federal Reserve news.
Despite the Tuesday jump though, GBP/USD remained well below last week’s opening levels of 1.2728. GBP/USD has gained over a cent from the week’s opening levels of 1.2588 however, and trended close to the level of 1.2690 at the time of writing.
The US Dollar saw broad losses on Tuesday. Investors sold the currency in anticipation for a more dovish Federal Reserve on Wednesday, despite expectations that the Fed will hike US interest rates for the fourth time this year.
Meanwhile, Brexit uncertainties continue to cloud the Pound (GBP) outlook. Sterling has benefitted from hopes that the UK will be convinced to avoid any kind of ‘no-deal Brexit’, but its strength is limited.
Pound (GBP) Exchange Rates Rebound Slightly on Hopes for ‘No-Deal Brexit’ to be Avoided
On Monday, UK Prime Minister Theresa May announced that the UK Parliament debate on her negotiated UK-EU Brexit deal would resume on the 7th of January, with the anticipated vote on her deal delayed to the week of the 14th.
While there was relief that the vote would still take place, there is concern in markets that it has been delayed too much, risking a possible ‘no-deal Brexit’ in the event that the deal is blocked.
The UK government has also indicated it will ramp up preparation for a ‘no-deal Brexit’.
On the other hand though, Sterling found some support on fresh hopes that UK politicians may warm up to May’s deal due to a lack of alternatives.
The EU has indicated that it would not support a so-called ‘managed no-deal Brexit’, a theoretical ‘no-deal Brexit’ in which the UK and EU cooperate to mitigate potential damage.
Hopes that UK MPs will be pressured to help avoid a ‘no-deal Brexit’ helped the Pound to climb versus a weak US Dollar on Tuesday.
US Dollar (USD) Exchange Rates Tumble as Federal Reserve Interest Rate Hike Bets Fall
The Federal Reserve is still widely expected to make its fourth 2018 US interest rate hike when it holds its December policy decision on Wednesday evening.
However, global markets are more curious about the bank’s 2019 outlook, as signs of slowing growth both in the US and globally gain pace and weigh on Fed interest rate hike bets.
Fed Chairman Jerome Powell said recently that the Fed interest rate is quite closely below neutral, meaning that unless upcoming US data is particularly strong soon it might not rise much further.
With the Federal Reserve dialling back on hawkishness and interest rate hike bets lightening, the US Dollar is losing its shine to investors.
Fed interest rate hike bets have been pressured even further by criticism from US President Donald Trump, who has been urging the bank to stop hiking US interest rates.
Despite this though, the US Dollar’s overall appeal and outlook is fairly strong. Slowing global growth and weaker business confidence is keeping safe haven currencies like the US Dollar more appealing.
Pound to US Dollar (GBP/USD) Exchange Rate Investors Anticipate Federal Reserve’s Tone
Some of the week’s more notable US data will be published on Wednesday, including existing home sales and current account stats.
However, investors are likely to brush over the data as they look ahead to the evening’s highly anticipated Federal Reserve police decision.
The Federal Reserve will likely confirm its fourth 2018 interest rate hike during the decision, but the tone the bank takes regarding its 2019 monetary policy outlook will be particularly influential.
If the bank indicates that there will be at least another interest rate hike or two, the Pound to US Dollar (GBP/USD) exchange rate could slide as the US Dollar recovers.
On the other hand, if the bank plays up the importance of US data on interest rates, Fed rate hike bets will lighten and GBP/USD may be in for further gains.
As Pound investors focus on Brexit news, Wednesday’s UK inflation rate is unlikely to be particularly influential either.
Brexit jitters are also likely to keep pressure on Sterling while the US Dollar benefits from global safe haven demand, so the Pound to US Dollar (GBP/USD) exchange rate’s potential for gains is overall limited.