USD Weakens, Pound US Dollar Exchange Rate Climbs

December 30, 2016 - Written by Minesh Chaudhari

STORY LINK USD Weakens, Pound US Dollar Exchange Rate Climbs

The Pound to US Dollar exchange rate fluctuated for most of the week but by Friday the pair was edging above the week’s opening levels. The final trade day of 2016 was largely corrective trading with a lack of fresh driving factors.

GBP/USD tested the level of 1.23 on Friday but was largely unable to hold above that level. The exchange rate has lost a significant 25 cents in value since the beginning of the year due to the Brexit vote.

Pound (GBP) Edges Higher Despite Poor Underlying Factors

Demand for the Pound has been limited over the last week and the British currency has lost value against a basket of currencies. Despite this, Sterling has edged higher against the US Dollar due to this week’s USD selloff.

Reasons for the Pound’s poor performance include, of course, ongoing concerns about whether or not Britain will be able to maintain access to the EU’s single market following the Brexit process.

Sterling’s movement improved slightly on Friday in part due to being bought from its lows. The currency also benefitted slightly from comments from veteran EU lawyer, Jean-Claude Piris.

While Piris claimed it would be ‘impossible’ for a new UK-EU trade deal to be created in just two years, he stated Britain could avoid economic catastrophe with a transitional deal.

This has been seen by investors as another hint that those on the EU side would be willing to negotiate a transitional Brexit which has slightly improved the long-term UK business outlook – and the Pound outlook.

US Dollar (USD) Sold from Highs in Profit-Taking

The US Dollar continues to have strong underlying factors and investors face 2017 with an optimism towards the US economic outlook despite the broad uncertainty of the upcoming Trump Presidency.

Despite this, some analysts have perceived the ‘Greenback’ as having been overbought since its November and early-December bullishness. The uncertainty ahead is one of the primary reasons some analysts believe USD to be currently overvalued.

Due to this and quiet late-year profit-taking opportunities, the US Dollar has been sold from its highs this week. The past week’s US ecostats didn’t help much, as they revealed the US trade deficit had widened further than expected to a disappointing –US$65.3b.

GBP/USD Forecast: PMI and US NFP Results Due in First Week of 2017

Almost to make up for the quiet end of year trade week just passed, the first week of 2017 will be stuffed with influential datasets that may cause some shifts in the Pound to US Dollar exchange rate going forward.

Most markets will be closed on Monday to observe the New Year holiday, but Tuesday’s data includes UK December Manufacturing PMI results from Markit as well as US December Manufacturing PMI from ISM.

Wednesday’s session will follow with UK Construction PMI and November consumer credit figures. The Federal Reserve will also publish its latest meeting minutes report on Wednesday which analysts are sure to peruse for any further hints on the coming year’s interest rate outlook.

Thursday will see UK Services and Composite PMI figures published as well as US Non-Manufacturing Composite results, but Friday’s US Non-Farm Payrolls report from December is likely to be the biggest trade event of the week.

Any large unexpected shifts in the US labour market could change the market outlook for Trump’s fiscal stimulus plans as well as the Fed’s interest rate hike plans.

Speaking of Trump, the US Dollar may see increased volatility in January as the beginning of Trump’s Presidential term nears and uncertainty increases. Sterling, of course, will continue to see increased Brexit uncertainty with the activation of Article 50 under three months away.

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