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Pound US Dollar (GBP/USD) Exchange Rate Tumbles on Barnier Brexit Comments

February 9, 2018 - Written by Toni Johnson

Barnier Insists Brexit Transition Deal ‘Not a Given’, GBP Exchange Rates Tumble

The Pound US Dollar (GBP/USD) exchange rate pared recent gains on Friday as markets reacted to a slew of disappointing UK ecostats and fresh comments from EU Brexit Negotiator Michel Barnier.

In respect to the former, the UK’s trade deficit widened from £-3.65b to £4.869b in December, significantly worse than the expected £-3.2b.

This marked the largest UK trade deficit since September of 2016, with a jump in the UK’s importation of oil from Europe (primarily Europe) being the predominant driver.

Beyond this, month-on-month industrial production in the UK contracted by -1.3% in December, missing the market forecast of a -0.9% drop and printing drastically lower than the downwardly revised 0.3% increase in November.

This was the biggest decrease in industrial output since September 2012.

Construction output also disappointed by contracting -0.2%, but manufacturing production printed at 1.4% - maintaining growth for the eighth consecutive reading.

In other, perhaps more significant news, Barnier asserted that a transition period after Brexit day is not a given, pointing to ongoing disagreements regarding the customs union, freedom of movement, and the UK’s relationship with EU law as factors that could prevent settlement.

Barnier insisted that the UK must ‘accept the ineluctable consequences of its decisions to leave the EU, to leave its institutions and its policies’, continuing:

‘If these disagreements persist the transition is not a given’.

This caused the Pound to shed a great deal of its recent gains, particularly with the Bank of England (BoE) having recently stated that a rate hike in May will be largely dependent on progress being made in Brexit negotiations.

US Government Shutdown Proves Brief, USD Exchange Rates Rally

US Dollar (USD) exchange rates rallied on Friday afternoon after the Senate and the House finally approved the problematic bipartisan budget package - thus ending the US Government’s shutdown.

The House approved the bill by 240 votes to 186 whilst the senate passed it by 71 to 28 some three hours prior.

Paul Ryan, Republican House Speaker praised the decision as a ‘great victory for our men and women in uniform’, stressing the importance of the bill’s push for substantial military spending.

He continued:

‘Ultimately, neither side got everything it wanted in this agreement, but we reached a bipartisan compromise that puts the safety and wellbeing of the American people first’.

Whilst this was the second US government shutdown of 2018, the fact that it was so brief minimised any potential long-term negative effects on the US Dollar.

Beyond this, the US Dollar continues to benefit from a wave of optimism that resulted from recent hawkish statements from Philadelphia Fed President Patrick Harker, who claimed that he was open to a rate hike as early as March.

This kept the GBP/USD exchange rate in the ‘Greenback’s favour.

Pound US Dollar (GBP/USD) Exchange Rate Forecast: UK Inflation in the Spotlight

The Pound US Dollar (GBP/USD) exchange rate could encounter some volatility next week as markets respond to the UK’s latest consumer price index readings.

The BoE asserted in their latest monetary policy statement that an early rate hike would be dependent on the performance of inflation, thus raising the stakes for this month’s release.

If inflation continues to remain above the central bank’s target level then markets will increasingly price in a May rate hike, an event that would lend the Pound some support.

Across the pond, markets will also be keeping a keen eye on the US inflation readings (expected Wednesday).

Inflation continues to be problematic for the States, though now that wage growth is on the rise and employment is tightening, many are beginning to predict a steady uptick in consumer prices.

If this occurs then the GBP/USD exchange rate could remain in the US Dollar’s favour.
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