GBP USD Exchange Rate Recovers Ground on Hopes for Brexit Progress

October 20, 2017 - Written by David Woodsmith

STORY LINK GBP USD Exchange Rate Recovers Ground on Hopes for Brexit Progress

Although last night’s meeting of EU leaders yielded some positive comments this was not enough to particularly boost the Pound US Dollar exchange rate.

Even so, confidence in the Pound recovered somewhat as investors took encouragement from signs that EU negotiators could start to prepare for the second phase of talks before the end of the year.

While the UK government has missed its initial aim to move onto the subject of transition and a future trade deal at this juncture this did not particularly weigh on the minds of investors.

However, confidence in the US Dollar strengthened further on Friday morning on the back of news that the US Senate has voted to approve a budget blueprint for the 2018 fiscal year.

This signalled a slight step forward for market hopes of the Trump administration finally delivering on its promised tax reforms, even though opposition still remains.

As a result the ‘Greenback’ was able to largely shake off the impact of an unexpected contraction in September’s leading indicators index, even though this pointed towards weaker economic growth.

Third Quarter UK GDP May Support Pound Uptrend

Hopes that markets could soon start to see tangible progress in negotiations may help to limit the downside potential of the Pound in the near future.

However, as James Knightley, Chief International Economist at ING, commented:

‘There is going to be no further progress on negotiations until the UK is willing to bend on the divorce payment. €20bn in payments for the two year transition period doesn’t cut it for the EU with reports suggests that an extra €20bn is likely to be needed (at least) before the EU is willing to talk future arrangements. With progress being made on citizens’ rights and (supposedly) the Irish border December is a realistic start point for those discussions assuming the UK is willing to be more flexible and stump up an extra bit of cash that amounts to less than 1% of annual GDP.’

Further jitters are likely to be in store for the GBP USD exchange rate ahead of Wednesday’s third quarter UK gross domestic product report.

While no change is expected from the previous quarter this could still offer support to Sterling, encouraging some degree of confidence in the domestic economic outlook.

On the other hand, if growth shows fresh signs of losing momentum then the mood towards the Pound could sour significantly.

With signs already pointing towards weakening consumer spending there are questions over the resilience of the UK economy, something which could be exacerbated by any increase in Brexit-based uncertainty.

US Dollar Could Find Continued Support on Hawkish Fed Comments

The relatively high odds of an imminent interest rate hike from the Federal Reserve have kept the US Dollar supported this week.

As analysts at UOB Group noted:

‘According to the latest Fed Beige Book, economic activity grew at a measured pace across the country in September and October despite sector-wide disruptions caused by recent hurricanes in the Southern and Eastern US.

‘The pace of growth was split between moderate and modest among the Fed’s 12 districts. A stable economy and the tightest labour market in years, however, did little to move the needle on inflation. The Fed characterized the increase in wages and the cost of materials as “modest”.’

Commentary from Fed Chair Janet Yellen on the subject of monetary policy could bolster demand for the ‘Greenback’ further tonight, with investors watching closely for any fresh policy signals.

As long as Yellen maintains a relatively hawkish stance then the GBP USD exchange rate could soften further, with markets likely to continue betting on a November or December rate hike.

However, if the policymaker’s tone proves to be a little more cautious in nature then the US Dollar may be prompted to cede some of its ground.

With markets already pricing in an imminent interest rate move the ‘Greenback’ remains more vulnerable to the downside, especially if domestic data shows signs of weakness in the near future.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Dollar Forecasts