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GBP/USD Exchange Rate Rises as Gloomy Brexit Report is Challenged

January 30, 2018 - Written by Frank Davies

During Monday’s trading session, the Pound to US Dollar exchange rate deteriorated because of a meeting about the specifics of the UK transitional deal.

The GBP/USD exchange rate opened in the region of 1.4138 on Monday morning, but later closed down around 1.4074 during the evening.

With little high-impact data to refer to, Pound traders instead had to consider a meeting of EU ministers; these officials were discussing what kind of transitional deal the UK would have before fully exiting the EU.

The meeting concluded late in the day with a fairly negative outcome – EU Chief Negotiator Michel Barnier stated that the UK would keep its membership perks during the transition, but would be unable to veto the creation of new EU laws.

Emphasising the EU’s unshifting position on this matter, Mr Barnier added;

‘The United Kingdom must acknowledge these rules of the game and accept them from the outset.

Otherwise, there would be a kind of a la carte single market. That is not possible.

I want to remind you, without agreement on all the withdrawal issues, there is no transition’.

The transition period is seen by some as too short, given that the UK needs to convert EU laws and regulations to UK versions before final departure.

The fact that the UK will have to obey EU laws throughout the transition has only increased concerns about the government’s ability to successfully enact Brexit with minimal damage to the UK economy.

Monday afternoon brought high-impact US data, in the form of personal income and spending stats for December.

During the month, incomes rose from 0.3% to 0.4%, but spending fell from 0.8% to 0.4%.

This mixed data still left the US Dollar trading higher against the Pound, mainly because higher incomes could naturally lead to higher spending in the country.

GBP/USD Exchange Rate Rises despite Brexit Report Warning of UK Economic Slowdown

The Pound has advanced by 0.4% against the US Dollar today, in addition to seeing a 0.3% rise against the Australian Dollar and tight trading against the Euro.

The headline news has been negative, with a leaked Brexit report suggesting that the UK risks an economic slowdown regardless of how it leaves the EU.

The document, compiled by the Brexit Department itself, forecasts damage to the UK economy due to Brexit over the next 15 years.

There have been plenty of challenges to the findings, however, which may have reduced the negative impact of the document.

In particular, because the report is looking so far into the future, it is claimed that it can’t be considered an accurate outlook due to unpredictable changes that could take place.

Another argument is that the leaked report doesn’t include forecasts for the government’s preferred trading agreement with the EU, which would ideally be a custom-made deal.

Tensions about Change of Fed Leadership Trigger USD/GBP Exchange Rate Decline

The US Dollar has lost ground to the Pound today, falling by -0.3% in the pairing.

This decline is partly down to investor uncertainty about the US Federal Reserve, which will be changing leaders next week.

Janet Yellen, Fed Chair since 2014, will be replaced by fellow Fed member Jerome Powell.

Mr Powell is considered a safe successor to Yellen and as he is coming as the Fed tightens monetary policy, it is hoped that he could exceed Yellen in engaging in interest rate hikes.

There is no guarantee that the status quo will actually be maintained, however, which has resulted in the US Dollar slipping against peers because of low confidence among traders.

BoE Governor’s Speech in Focus for Near-Term GBP/USD Exchange Rate Movement

The Pound could turn volatile against the US Dollar this afternoon, when Bank of England (BoE) Governor Mark Carney makes his first big speech of 2018.

Mr Carney will be speaking at 15:30 GMT and could hint at one or more UK interest rate hikes this year.

While forward guidance is rarely so explicit as to include overt signposting, Carney’s comments could still be interpreted optimistically and lead to a GBP/USD rate rise.

Further ahead, however, Sterling could dip when Wednesday’s GfK consumer confidence reading comes out.

This is tipped to show continued negative sentiment among consumers in January, so the Pound could weaken on the news.

Over in the US, it will be worth keeping an eye on President Donald Trump when he gives his first State of the Union Address.

Taking place early on Wednesday (GMT), the speech could trigger US Dollar volatility if Trump suggests that a US economic resurgence could take place.

The President still needs to work through the immediate risk of government shutdowns, but if his plans for 2018 seem sound then the US Dollar could rise sharply.
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