High Odds of No-Deal Brexit Drive Pound Sterling US Dollar (GBP/USD) Exchange Rate to 28-Month Low
As Boris Johnson continued to ramp up his no-deal Brexit rhetoric this pushed the Pound Sterling to US Dollar (GBP/USD) exchange rate to a fresh 28-month low on Tuesday.
The increasing shift towards the hardest form of Brexit left markets unsettled, with the UK crashing out of the EU at the end of October now seeming the most likely outcome.
With Johnson insisting on the removal of the Irish backstop from the withdrawal agreement the two sides appear to be at a fresh impasse, forcing investors to price in a potential no-deal Brexit.
Although the possibility of a general election continues to hang over the political landscape this was not enough to prevent Pound Sterling (GBP) from falling further out of favour.
Low Chances of US-China Trade Talk Progress Fails to Dent USD Exchange Rates
Ahead of the latest round of US-China trade talks the US Dollar (USD) benefitted from a general deterioration in market risk appetite.
With investors not expecting to see any particular progress at this stage the risk of further trade tariffs lingered.
While the ongoing trade dispute has already shown signs of negatively impacting the US economy the prospect of further disruption failed to weigh down USD exchange rates at this stage.
The US Dollar’s status as a safe-haven currency helped to limit the impact of the Trump administration’s latest belligerent signals on China as market risk aversion increased.
However, some of the initial gains of USD exchange rates eased over the course of trade on Tuesday as June’s US personal consumption expenditure core reading missed the mark.
As the Federal Reserve’s preferred measure of inflation clocked in at 1.6%, rather than 1.7%, this added to speculation that interest rates will see a sharp cut.
Increased Signs of Federal Reserve Dovishness Set to Drag on US Dollar (USD)
This disappointing showing raised the stakes ahead of Wednesday’s Federal Open Market Committee (FOMC) rate announcement, leaving the US Dollar on a weaker footing.
Although forecasts point towards a 25bpt interest rate cut some investors were encouraged to bet on the possibility of a 50bpt move.
If the Fed does deliver a more significant interest rate cut than markets have currently priced into USD exchange rates this could see the mood towards the US Dollar sour.
Fresh dovish commentary from Fed policymakers could also put pressure on USD exchange rates in the near term, with monetary policy looking set to ease further before the end of the year.
On the other hand, signs that the Fed is taking a less dovish outlook on the US economy may help to limit the vulnerability of the US Dollar this week.
Any suggestion that the central bank could remain on hold in the wake of July’s policy decision would leave the GBP/USD exchange rate vulnerable to a fresh multi-year low.