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GBP/USD Exchange Rate Surges Over 1% on Reports of Soft Brexit Backing

January 12, 2018 - Written by John Cameron

Spanish, Dutch Finance Ministers Announce Push for Soft Brexit, GBP/USD Exchange Rates Soar

The Pound US Dollar (GBP/USD) exchange rate soared to its highest point since the Brexit vote on Friday afternoon as markets responded to news that Spanish and Dutch Finance Ministers are prepared to back a soft Brexit deal.

Two finance ministers are reportedly in agreement to work together to push for a softer deal – a move that appears to break away from the EU’s ‘united front’.

This is all the more pertinent in that the EU has previously been insistent that the UK will not be able to negotiate a ‘bespoke’ Brexit deal - a possibility that said ministers seem to be moving away from.

An Official from the Spanish economy’s ministry quickly insisted that these ministers were simply underlining ‘the importance of UK ties for both countries’, and that they ‘agreed to keep track of this common interest, but while offering full support towards Michel Barnier’s negotiating efforts’.

Other analysts have also pointed out that this doesn’t necessarily mean that a breakthrough is imminent, however, with Jordan Rochester at Nomura stating:

‘It’s good news but not game changing, even as someone who is already long Sterling… There will also be member states pushing the other way’.

US Core Inflation Inches Ahead, GBP/USD Exchange Rate Unperturbed

America’s December inflation readings were released today, with the core measure notably rising.

The year-on-year core inflation rate (excluding food and energy prices) increased by 1.8% year-on-year in December, beating November’s 1.7% print and the market expectations of 1.7%.

The monthly reading similarly rose, this time from 0.1% to 0.3%, beating the consensus of 0.2%.

This marked the highest monthly rate in some 11 months, with a surge in the cost of shelter, medical care, automobiles and motor insurance driving prices higher - but it also proved pertinent in that it effectively raises the 2018 rate hike prospects of the US Federal Reserve.

US Fed Policymakers have been rather divided as of late, with some calling for three rate hikes in 2018, as initially forecast, and others calling for an outright halt to rate hikes for the time being.

San Franciso Fed President John Williams exists in the former camp, pointing to the positive performance of the US economy and stating:

‘We’re in a pretty good situation: the economy is doing great, everyone expects us to raise rates gradually… and if the data changes we can respond to that’.

Chicago Fed President Charles Evans is in the latter, however, dismissing the notion that inflation will reach the bank’s target range of 2% any time soon.

This news was, nonetheless, ineffectual in bolstering the US Dollar (USD), with GBP/USD largely being unperturbed.

GBP/USD Exchange Rate Forecast: Volatility Possible on UK Inflation Readings

Although the Pound US Dollar (GBP/USD) exchange rate is currently soaring on Brexit news, its performance next week could be largely determined by the results of Tuesday’s UK inflation figures.

The headline year-on-year reading for December is expected to print at 3%, down from the previous period’s 3.1%, whilst the core reading is expected to remain steady year-on-year at 2.7%.

Whilst this is still notably high, a fall could potentially indicate that the November Bank of England (BoE) rate hike was warranted.

A fall beyond this, however, could push BoE policymakers away from further rate hikes, potentially driving demand for the Pound down in the process.

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