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GBP/USD Exchange Rate Drops after Warning Signs from EU’s Verhofstadt

December 12, 2017 - Written by David Woodsmith

On Monday’s trading session, the Pound slipped against the US Dollar due to a lack of supportive UK data.

The GBP/USD exchange rate opened in the region of 1.3395 early on Monday, but closed down at 1.3347 by the end of the day.

Growing Concerns over Brexit-based Damage Weigh on GBP/USD Exchange Rate

The Pound has seen a small decline against the US Dollar today, amid a flurry of economic data and pessimism over Brexit.

In the former case, Pound traders have panicked after UK inflation was reported at 3.1% in November.

This increase from 3% hadn’t been widely predicted, so traders were understandably alarmed by the news.

Responding to the news, Aberdeen Standard Investments Chief Economist Lucy O’Carroll said;

‘This is slightly higher than expected and will prompt a letter from Bank of England Governor Carney to the Chancellor, explaining why inflation has overshot its target by this margin and what the Bank will do about it.

It’s quite possible that inflation is now close to its peak. But some of the latest surveys suggest that service sector costs and prices are rising.

Given how dominant services are in the economy, this could feed through to inflation overall’.

Although higher inflation might bring assumptions that higher interest rates are on the way, O’Carroll has pointed out the difficulties faced by BoE policymakers in coming months;

‘The Bank of England has a tricky tightrope to walk. Too much inflation could threaten the Bank’s credibility and therefore its grip on the economy.

But they need to keep consumer spending, the engine of the UK economy, chugging along too.

If inflation keeps creeping up, or remains elevated, then the chances of the engine sputtering rise incrementally’.

In other and similarly concerning UK news, European Parliament official Guy Verhofstadt has denounced UK Secretary David Davis for his ambiguous statements.

Over the weekend, Davis watered down government plans for the Irish border, suggesting that these were a ‘statement of intent’ rather than any firm commitment.

Verhofstadt has blasted these remarks, saying;

‘After David Davis’ unacceptable remarks, it’s time the UK government restores trust. As someone said, it’s an own goal.

It is clear that the European council will be more strict now. It is saying, “Yeah, OK, these are our intentions, our commitments, we want these commitments translated into legal text before we make progress in the second stage.”

That is now the position of the council. I have seen a hardening of the position of the council and there will be a hardening of the position of the European parliament’.

This has had the effect of throwing the outcome of this week’s EU summit into question.

It had been assumed that the UK’s Brexit progress would be approved, but such a result is by no means a certainty now.

USD/GBP Rate Rises despite Fears over Trump Leadership

The US Dollar to Pound gains seen today have apparently been caused by GBP weakness, rather than any particular strength in the US.

US economists are predicting that President Donald Trump might not be all he was cracked up to be, as some economic growth is being attributed to overrunning policy decisions from the previous administration.

The President has even been blamed for economic deterioration in some cases, which has further weakened confidence in his leadership towards the end of the first year.

GBP Rally Possible if UK Earnings Rise by More than Forecast

Before the Pound turns volatile from Thursday and Friday’s developments, the GBP/USD exchange rate could still pick up on Wednesday’s average earnings reading.

Including bonuses, UK average earnings are predicted to have risen from 2.2% to 2.5% in October.

This would lessen current UK wage squeeze conditions, but with a gap of 0.6%, the squeeze would unfortunately still be present.

Real incomes are a key factor during the Christmas spending period, so any signs of improving conditions for consumers could trigger a GBP/USD rate rise.

The Federal Reserve will be in the spotlight on Wednesday evening, when the bank makes its last interest rate decision of 2017.

Fed policymakers are widely expected to hike rates from 1.25% to 1.50%, which could push the US Dollar up against the Pound.
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