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EU Removes ‘Punishment’ Brexit Clause - Pound US Dollar (GBP/USD) Exchange Rate Climbs

February 15, 2018 - Written by Toni Johnson

GBP/USD Exchange Rate up on Signs of Brexit Cooperation from EU

The Pound US Dollar (GBP/USD) exchange rate extended its lead on Thursday, rising as markets responded to news that the EU has removed the divisive ‘punishment’ clause from the Brexit transition text.

This footnote asserted that the UK could potentially lose access to various parts of the single market if it broke EU rules over the 2-year transition period, a clause that caused controversy and condemnation from Downing Street soon after it was leaked.

UK Brexit Secretary David Davis stated:

‘I do not think it was in good faith to publish a document with frankly discourteous language, and actually implying that they could arbitrarily terminate, in effect, the implementation period. That’s not what the aim of this exercise is. It’s not in good faith, and we think it’s unwise to publish that’.

The EU’s decision to remove this clause signified that they are willing and able to make concessions and, whilst this was only a small compromise on their part, it signalled to markets that hope remains for movement on subjects like the UK not being subject to EU laws during the transition period, and the rights of EU citizens in the UK.

This news helped support the Pound, with markets gaining slight confidence that sufficient progress will soon be made on the Brexit transition front.

Mixed US Ecostats Limit Upward Potential (USD) Exchange Rates

Yesterday’s upbeat US inflation readings failed to support the US Dollar (USD) on Thursday, as markets responded to a fresh run of mixed data releases.

According to the US Labour Department the number of Americans filing for unemployment benefits rose last week, though the figure still remained near historic lows.

The initial jobless claims print jumped by 7000 to a seasonally adjusted 230,000 in the week ending the 10th of February, higher than the market forecast of 228,000 and the previous period’s 223,000.

Whilst disappointing, the US labour market continues to remain near full employment, with the jobless rate at a 17-year low of 4.1%.

Beyond this, the US Philadelphia Fed business outlook reading for February leapt to 25.8, smashing market expectations of a rise to 21.8 and the previous period’s 22.2.This was largely thanks to ongoing business optimism in light of US President Donald Trump’s sweeping tax reform.

In other, more disappointing news, the US month-on-month industrial production reading for January contracted from 0.4% to -0.1%, coming up short of the market expectation of 0.2%.

Manufacturing production proved similarly soft, printing at 0.0%, consistent with the previous period and below the forecast of 0.3%.

This news, combined, left the US Dollar floundering.

GBP/USD Exchange Rate Forecast: UK Wage Growth in the Spotlight

Pound (GBP) exchange rates may remain under the thumb of Brexit-related soundbites, but Sterling could find some support next week if wage growth improves akin to the expectations of agents of the Bank of England (BoE).

According to a survey by BoE agents, the rising minimum wage and staff shortages could be set to steadily lift wages above inflation.

Companies now expect to increase pay by 3.1% in 2018, up from the previous year’s 2.6% according to the latest survey of private-sector employers - with various early indicators pointing to pay growth across the board.

Combined with a tightening labour market this news could push the BoE even closer to an earlier-than-expected rate hike, with many analysts now pricing in a rate increase in May.

In the meantime, lacking much in the form of significant ecostats, the Pound will likely be left vulnerable to Brexit-related news, with demonstrable progress liable to provide support and an ongoing deadlock liable to put GBP/USD under pressure.
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