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GBP to USD Exchange Rate Slips as Investors Await Fresh Brexit Talks

July 17, 2017 - Written by Ben Hughes

Despite a drop in Federal Reserve interest rate hike bets and underwhelming US ecostats, the British Pound to US Dollar exchange rate slipped when markets opened this week. It has sustained most of last week’s advances however.

Federal Reserve uncertainty has seen GBP/USD advance in recent weeks. Last week, GBP/USD advanced from 1.2888 to over 1.30 and its best levels since September 2016. However, on Monday morning the pair slipped.

GBP Dips on Persistent Political Uncertainties

The Pound recovered towards the end of last week on speculation that the Bank of England (BoE) may be becoming more likely to discuss whether or not to withdraw its aggressive quantitative easing (QE) scheme.

However, amid expectations that most BoE policymakers continue to have cautious or dovish tones, the Pound’s gains were limited.

Sterling slipped when markets opened this week as investors became anxious about this week’s upcoming Brexit negotiations.

The second round of negotiations are expected to focus on the post-Brexit rights of UK and EU citizens. EU officials have recently criticised UK Prime Minister Theresa May’s proposals EU citizens’ rights in the UK, arguing they did not provide satisfactory clarity.

Concerns are rising that with the most high-priority discussions taking longer than some UK government officials had hoped, there would be no trade deal in place by the end of the two-year Brexit deadline.

Pound traders are hoping for more hints that a post-Brexit transition deal could be put into place.

On top of Brexit jitters, reports claiming that there is discord within the UK Conservative government have weighed on Pound demand this week. This has prevented Sterling from holding its ground even against a weak US Dollar.

USD Recovers from Inflation-Based Selloff

Monday saw some investors return to the US Dollar after a ‘Greenback’ selloff last week, but its recovery was limited and GBP/USD held most of last week’s gains.

Investors sold the US Dollar on Friday when it was confirmed that US inflation had been even worse in June than analysts expected.

Analysts forecast that US inflation would slow from 1.9% to 1.7% year-on-year, but instead it slowed to 1.6%. Monthly inflation disappointed too, coming in at 0% rather than the forecast 0.1%.

US retail sales from June also fell short of expectations, contracting at -0.2% month-on-month and slowing from 3.8% to 2.8% year-on-year.

These datasets worsened market concerns that US inflation was slowing and would not be able to support another Federal Reserve interest rate hike before the end of the year. Fed rate hike bets for 2017 are currently below 50%.

There wasn’t much reason for investors to buy the US Dollar on Monday either, as Empire’s July US manufacturing report fell well short of expectations. Manufacturing was forecast to slip from 19.8 to 15, but instead dropped to 9.8.

According to Michael Hewson, chief market analyst from CMC Markets UK;

‘An unexpectedly cautious testimony from Fed chief Janet Yellen to US lawmakers, as well as some disappointing economic data on the part of the US consumer and some more weak inflation data appears to raising doubts about the pace of future US rate rises.’

GBP/USD Forecast: UK Inflation Due Tuesday

The Pound to US Dollar exchange rate could advance further if investors perceive the Bank of England (BoE) as being more likely to act in the foreseeable future than the Federal Reserve.

If UK inflation continues to be higher than expected, this could keep pressure on the BoE. Analysts suggest that if UK inflation remains well above the bank’s targets, it will eventually become pressured to adjust monetary policy.

British inflation is forecast to have remained at 2.9% year-on-year in June. If inflation rises to 3%, GBP/USD could advance on Tuesday.

On Thursday, Britain’s June retail sales results will be published. If these disappoint, GBP/USD will plunge as concerns worsen about the effect of the UK pay squeeze on consumer activity and the British economy.

The US Dollar is unlikely to be heavily influenced by US ecostats this week, but housing data and jobless claims results due later in the week could support the ‘Greenback’ if they impress.
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