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GBP/USD Exchange Rate Slides on Brexit Uncertainty and Caution Ahead of First BoE Rate Decision of 2018

February 7, 2018 - Written by John Cameron

Brexit Uncertainty Continues to Limit Pound US Dollar (GBP/USD) Exchange Rate

The Pound US Dollar (GBP/USD) exchange rate took a tumble on Wednesday as markets reacted to ongoing uncertainty in the Brexit negotiation process, the looming Bank of England (BoE) rate decision and optimism for today’s run of US Fed President speeches.

On the Brexit front very little has been revealed in terms of demonstrable progress this week, though UK Prime Minister Theresa May is meeting today with the Brexit cabinet committee to better sketch out exactly what the future relationship between the UK and the EU will resemble.

Some controversy has occurred, however, in the form of a leaked EU withdrawal agreement draft which has a footnote that pushes for Brussels to have the means to restrict single market access for the UK if the European Court of Justice (ECJ) fails to solve disputes within the two year transition period.

These restrictions could take the form of tariffs imposed on goods, the enforcement of customs checks or the grounding of flights via the suspension of aviation rights.

If this came to pass then it could pose a potential threat to the UK’s economy, however, the UK government has dismissed the significance of the leaked document, simply stating that it will form part of the negotiations.

Markets are, nonetheless, anxious for progress in transition talks, with any delay liable to push the March trade talks further into 2018 and leave UK businesses in a prolonged state of uncertainty.

US Dollar (USD) Exchange Rates Gain in Anticipation of US Fed President Speeches

US Dollar (USD) exchange rates gained on Wednesday as the markets geared up for a run speeches by various Presidents of the US Federal Reserve.

These included speeches from Dallas President Robert Kaplan, New York President William Dudley and an imminent speech from hawkish San Francisco President John Williams.

Kaplan’s speech was quite optimistic about the recent stock market correction, which he described as ‘healthy’, though he also dismissed the idea that rising wages will definitely prompt a rise in consumer prices.

Kaplan stated:

‘We’re facing wage pressures right now in the United States because of a tight labour market," Kaplan, a dove and a non-voting member of the Fed's policy committee, told an audience in Frankfurt. I am less convinced that this will necessarily translate into higher prices because businesses have much less pricing power’.

This had very little effect on the US Dollar.

With the US economy surging ahead it is quite possible that Fed Williams will espouse optimism in his speech, though the depth by which he discusses monetary policy remains to be seen.

The markets are nonetheless optimistic, with analysts expecting a rate hike from the Fed as soon as March this year on the back of rising wages, employment and robust US growth.

GBP/USD Exchange Rate Forecast: BoE Rate Decision in the Spotlight

The Pound US Dollar (GBP/USD) exchange rate could encounter some turbulence on Thursday as markets react to the BoE’s first interest rate decision of 2018.

The BoE is not currently expected to raise interest rates at this meeting, but markets are increasingly hopeful that the Monetary Policy Committee (MPC) will prove optimistic about the UK’s economic trajectory and point to a rate increase as early as May.

This could be highly dependent on the progress made in Brexit negotiations, however, with bank Governor Mark Carney and the financial services company UBS stating as much in recent weeks.

If the BoE’s accompanying statement points to a rate hike in May then the GBP/USD exchange rate could gain some ground.

If the central bank proves dovish, however, then Sterling may continue to remain under the thumb of the US Dollar.
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