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GBP USD Exchange Rate Tumbles as London Fails to Reconcile Agreement with DUP

December 6, 2017 - Written by Toni Johnson

The Pound US Dollar (GBP USD) exchange rate continued its slide on Wednesday with markets anticipating a December rate hike from the US Federal Reserve and London failing to successfully reconcile a new deal with the Irish Democratic Unionist Party (DUP).

Theresa May Fails to Agree on Deal with DUP, GBP USD Exchange Rate Tumbles

UK Prime Minister Theresa May was unsuccessful in reconciling with the DUP on Wednesday, with ‘no breakthrough’ cited after her phone call with DUP leader Arlene Foster.

Markets have been increasingly concerned regarding the issue of the Irish border, with the latest collapse in negotiations having resulted from London’s efforts to surreptitiously push for regulatory alignment between Ireland and Ulster without first briefing the DUP.

Foster promptly disagreed with the proposal, on the grounds that it would potentially result in Northern Ireland being under a different ruleset to the rest of the United Kingdom.

This quickly dragged on demand for the Pound.

Beyond this, markets remain concerned that an agreement will not be secured in time for next week’s December summit; an eventuality that could delay trade talks even longer.

This would perceivably prolong a period of ‘low investment’ for UK businesses, as uncertainty on key issues like access to the EU’s single market will be perpetuated.

US Dollar (USD) Exchange Rates Bolstered by Rate Hike Hopes for December

The US Federal Reserve will almost certainly move to raise interest rates this month, according to a Reuters poll of economists.

The majority of economists questioned claimed to expect a third and final final rate hike this year, as well as three more rises next year rather than the two that were expected during a prior survey.

This outlook effectively placed economist sentiment in line with the Fed’s own projections for monetary policy, though there are concerns that limp levels of US inflation will continue to prevent a hawkish shift.

The core personal consumption expenditures price index (PCE) is cited as the Fed’s preferred measure of inflation (excluding food and energy) and it has consistently undershot the Fed’s target of 2%.

Markets also expect the figure to remain below 2% until 2019, though steady growth is expected.

Nonetheless, all 103 economists polled asserted that rates will once again be hiked by 25 basis points this December.

Brett Ryan, Senior US economist at Deutsche Bank reflected a similar sentiment:

‘This is about just getting back to a neutral level where monetary policy is neither encouraging growth nor pushing against growth’.

This outlook bolstered the ‘Greenback’, a currency which continues to ride on a wave of optimism regarding US President Donald Trump’s tax reform and a hawkish central bank.

GBP USD Forecast: Trump Tax Progress and Notable Ecostats Ahead

The outlook for the Pound remains tied directly to progress made (or a lack thereof) in Brexit negotiations.

If Theresa May is successful this week in securing a Brexit deal - first by reconciling and gaining the DUP’s approval – then the Pound will likely surge.

Conversely, the failure to move onto the next phase of negotiations in time for the EU summit next week will likely leave the Pound floundering.

Barring the former eventuality, it is unlikely that the Pound will mount the strength required to topple the US Dollar, particularly with Trump’s tax reform having passed the Senate vote.

Nonetheless, hurdles do remain for the Republicans who are now faced with the problematic process of integrating the House and the Senate versions of the bill.

It remains to be seen if the corporate tax rate will be successfully initiated straight away, or delayed another year - as per the Senate version of the bill.
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