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Continued Concerns about Brexit Progress Cause Pound US Dollar Losses

December 5, 2017 - Written by Ben Hughes

On Monday, the Pound opened trading against the US Dollar at a rate of 1.3489. While losses weren’t massive, the GBP/USD exchange rate still traded down at 1.3473 by the end of the day.

Failure to Solve Irish Border Issues Leaves GBP/USD Trading Down

The Pound has struggled to make any headway against the US Dollar today, owing to growing pressures concerns about a lack of Brexit progress.

On Monday, it had briefly seemed like the UK might be able to make real progress in Brexit talks, particularly regarding the Irish border.

At the eleventh hour, however, Democratic Unionist Party (DUP) leader Arlene Foster stepped in and rejected arrangements to leave Northern Ireland with some aspects of EU law after Brexit.

It is suspected that DUP officials fear neighbouring Ireland being able to unduly influence Northern Ireland if it remains closer to the EU than the UK after Brexit.

Summing up the situation as he sees it, DUP MP Sammy Wilson said;

‘[“Regulatory alignment” is] simply EU-speak for keeping Northern Ireland inside the customs union [and inside the single market].

We have made it quite clear, and [Theresa May] has made it quite clear, we will all be leaving the EU together, and that includes Northern Ireland.

This has had huge implications for her whole negotiating stance.

If she gives in on special demands for Northern Ireland, then she will be giving in to special demands for Scotland and other parts of the United Kingdom. It’s a unionist nightmare’.

In addition to Arlene Foster’s remarks on Monday, fellow DUP MP Nigel Dodds has laid out his party’s stance by saying;

‘We will not accept any form of regulatory divergence which separates Northern Ireland economically or politically from the rest of the United Kingdom’.

In an attempt to clarify the UK government’s position on the Irish border, UK Brexit Secretary David Davis said;

‘[PM Theresa May] made a very plain case for the sorts of divergence that we would see after we left.

She made the case that there are areas where we want the same outcome, but by different regulatory methods.

We want to maintain safety, we want to maintain food standards, we want to maintain animal welfare, we want to maintain employment rights.

We don’t have to do that by exactly the same mechanism as everybody else. That’s what regulatory alignment means’.

US Dollar Advances despite Disappointing PMI Stats

Although US domestic data hasn’t been especially positive, the US Dollar has still been a more desirable currency than the battered Pound today.

The US trade deficit has expanded in October, while the non-manufacturing PMI has also shown a slowdown.

Services and composite PMI readings showed more slowing activity, but the US Dollar nonetheless posted an advance against Sterling.

While the services slowdown was disappointing, IHS Markit Chief Business Economist Chris Williamson gave a balanced look at the data;

‘The slowest growth of service sector business activity since June, alongside a slight dip in the pace of manufacturing expansion, means the November PMI surveys registered a modest cooling in the overall rate of business growth.

Mid-way through the fourth quarter, the surveys are still pointing to a reasonable GDP growth rate of approximately 2.5%.

The surveys’ employment indices are meanwhile pointing to solid non-farm payroll growth of circa 200,000 as companies continue to take on staff in encouraging numbers to meet rising order books.

Disappointingly, optimism about the year ahead deteriorated as companies grew increasingly cautious about the outlook for 2018, suggesting risk aversion may start to rise, which could hit hiring and investment.

However, for now, businesses generally remain in expansion mode and the upturn shows few signs of losing momentum to any significant extent’.

GBP USD Rally Possible on Brexit Breakthrough

As the next significant UK data isn’t out until Friday, the Pound could remain subject to trader whims about the ongoing Brexit talks.

It is understood that Theresa May will be powering ahead with talks in a bid to secure an agreement by Friday; if this looks likely then the GBP/USD exchange rate could recover and start to rise.

More imminently, a US employment stat on Wednesday might have a greater influence on the pairing.

If the ADP employment change shows a larger-than-expected rise, the US Dollar could rise sharply against a flagging Pound.
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