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GBP to USD Exchange Rate Surges on Hopes of Brexit Breakthrough

December 4, 2017 - Written by James Fuller

Could the Pound to US Dollar exchange rate be in for another week of gains? That could be the case if major breakthroughs are made in UK EU Brexit negotiations in the coming sessions. On Monday, it emerged that EU negotiators were optimistic about a deal being reached, boosting Sterling.

Despite improving demand for the US Dollar, last week saw GBP/USD rise from 1.3336 to 1.3471. The pair was unable to hold above the key level of 1.35 last Thursday, but tested those highs again on Monday.

GBP Surges as UK and EU Seen Closing in on Brexit Deal

Strong UK PMIs in recent sessions have only further supported a strong Pound, as Sterling investors have been excited by hopes that the Brexit process could see significant progress this month.

Last week, it emerged that the UK and EU were coming closer to reaching a deal on the highly contentious Brexit ‘divorce bill’.

The divorce bill had caused months of deadlocks, but concessions made by the UK government appeared to have helped talks to proceed.

Another major issue, the border between Ireland and Northern Ireland, remained a concern over the weekend and continued to threaten further delays to Brexit talks.

However, Monday saw reports emerge that the UK government would also make concessions on the Irish border, though confusion remains about whether the concessions amount to ‘no divergence’ on regulations or ‘continued regulatory compliance’. This remains a key uncertainty.

There also remains the issue of Northern Ireland’s DUP Party, which remains opposed to the possibility of Northern Ireland’s economy being run separately to the rest of Britain.

Even though the Brexit divorce bill appeared to be close to reaching an agreement, it is possible for Ireland to completely veto progress on Brexit negotiations if it was not satisfied with how the border is handled. According to a report from the Financial Times;

‘Donald Tusk, the president of the European Council, said late last week that the EU would not agree any deal that Ireland did not support, in effect giving a veto over the talks to Leo Varadkar, Irish prime minister, who convened an emergency cabinet meeting on Brexit on Monday morning.

The compromise proposed by EU negotiators refers to the need for continued “alignment” with single market rules that support co-operation between Northern Ireland and the Republic, according to a person familiar with the text.’

USD Supported by US Tax Bill Progress

If not for the latest Brexit developments, the US Dollar could be pushing GBP/USD lower this morning, as Friday’s news that the US Republican Party successfully pushed its tax bill through a Senate vote caused ‘Greenback’ strength when markets opened on Monday.

The tax bill is set to see further scrutiny under Congress this week, but investors are largely optimistic about the bill’s chances and this is boosting US Dollar demand.

According to Angelo Meda from Banor SIM in Milan;

‘With this tax deal, markets could pick up speed into the end of the year. It looks like the ingredients for a year-end rally are there,’

GBP/USD Forecast: Brexit Developments Remain in Focus

With December’s EU summit set to take place on the 14th of December, Brexit news is likely to remain a major point of influence for Pound trade in the coming week.

The Pound to US Dollar exchange rate is most likely to react to Brexit news. With a deal seemingly increasingly close to being made, further hopes of the first phase of talks being closer to being finalised would boost hopes of trade talks beginning in the coming months.

This would cause ‘hard Brexit’ concerns to fade and the Pound outlook would be considerably higher.

UK data due later in the week, including UK trade data and production stats from October, are likely to take a backseat to Brexit news.

US Dollar trade will be similar over the coming week. Investors will highly focus on US tax bill developments and any signs that the tax bill will fail could lead to some strong GBP/USD gains as the ‘Greenback’ is sold.

On the other hand, success in the US tax cut plans could limit this week’s potential for GBP/USD gains.

US data could support the US Dollar too if it hints that the Federal Reserve is likely to continue its hawkish stance in 2018.
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