Political uncertainties surrounding the Brexit divorce agreement and the US Trump administration have caused volatility in the Pound US Dollar exchange rate towards the end of the week. Brexit developments over the coming weeks could have a big impact on the Pound outlook.
GBP USD has seen significant gains this week due to Brexit hopes, rising from 1.3337 to a two-month-high of 1.3548. The pair briefly dipped to 1.34 on Friday.
Pound (GBP) Slips on Irish Border Uncertainty
Following days of gains from hopes that the UK is closing in on Brexit ‘divorce bill’ agreements with the EU, the Pound slipped from its best levels during Friday trade.
Sterling surged on hopes that the highly contentious issue, which has caused multiple ‘deadlocks’ in negotiations, would finally be agreed and that significant progress in Brexit talks could be made by the end of the year.
However, concerns about the Ireland and Northern Ireland border have kept pressure on Sterling and limited its gains towards the end of the week.
An agreement on the Irish border is seen as the last major issue in the first phase of Brexit talks.
UK MPs expressed doubt that an ideal solution could be found, as Ireland and Northern Ireland wish to keep a soft border, while the UK government wishes for the rest of Britain to have a hard border with the rest of the EU.
Still, Ireland Foreign Minister Simon Coveney showed a little leniency on Friday. He stated that a deal on the border was ‘doable’ and that he hoped agreed wording could be reached on a deal by the EU summit on the 14th of December.
While concerns about the Irish border weighed on Sterling on Friday, Markit’s latest UK manufacturing PMI impressed investors and helped to limit Pound losses.
Markit’s manufacturing PMI was forecast to slip from 56.6 to 56.5, but instead rose to an impressive 58.2.
While other Markit PMI results will be published at the beginning of next week, Brexit developments are likely to remain in focus, particularly news on the Irish border.
If there are signs that the first phase of Brexit negotiations are seeing agreements and that talks could accelerate towards the end of the year, hopes for unlocked trade talks will rise and the Pound outlook will improve. According to Lefteris Farmakis from UBS;
‘Should a transition deal be confirmed, downside risks for the currency will be firmly pushed back in time. And equally, the alleviation of imminent tail risks should support Sterling, at least in the short term,’
On the other hand though, if it looks like the UK and EU will not reach agreements on the terms of Brexit divorce any time soon the Pound could shed much of its recent gains and ‘hard Brexit’ concerns will be revived.
US Dollar (USD) Strength Limited by Political Jitters
While recent US data has been solid and investors are hopeful for progress to be made on US tax cuts, the US Dollar has been more volatile towards the end of the week due to fresh US political uncertainty.
Wednesday’s US Gross Domestic Product (GDP) projections beat expectations, and personal consumption data on Thursday came in as forecast.
However on Thursday, reports emerged that US President Donald Trump was planning to boot Secretary of State Rex Tillerson and replace him with CIA chief Mike Pompeo.
News of fresh uncertainty in the Trump administration left US Dollar trade more jittery, but overall the US Dollar’s losses this week have been more due to Pound strength than ‘Greenback’ weakness.
Overall, US Dollar investors are more focused on US tax and this could continue drive ‘Greenback’ movement in the coming days.
While a vote on the Republican tax bill was not made in the US Senate on Thursday, the debate is set to continue today and could see a vote before the weekend – or early next week.
Either way, the US Dollar is likely to react to the latest tax news when markets open on Monday.
Throughout the next week, the US Dollar is likely to be influenced by tax news, US PMIs from ISM and November job market data.
Any news that supports the chances of the Federal Reserve continuing its hawkish tone in 2018 would notably improve the mid-term US Dollar outlook.
GBP USD Interbank Rate
At the time of writing this article, the Pound US Dollar exchange rate trended in the region of 1.3500. The US Dollar to Pound exchange rate traded near 0.7405.