GBP USD Exchange Rate Sees Muted Gains Despite Hopes of Post-Brexit UK Access to Single Market

February 20, 2018 - Written by James Fuller

STORY LINK GBP USD Exchange Rate Sees Muted Gains Despite Hopes of Post-Brexit UK Access to Single Market

Although the Pound US Dollar (GBP/USD) exchange rate staged something of a rally on Tuesday morning, benefitting from an easing in Brexit jitters, it was unable to hold onto this positive momentum for long.

Investors were initially encouraged by a report in Business Insider which suggested that the European Parliament is drawing up plans to offer the UK ‘privileged’ access to the single market in the wake of Brexit.

This suggested a softening in rhetoric and boosted hopes that the ultimate break between the EU and UK will not be as severe as previously feared, even though a significant degree of uncertainty still remains.

Even so, with demand for the US Dollar continuing to pick up in the wake of the previous week’s strong data the GBP/USD exchange rate soon returned to a weaker footing.

GBP/USD Exchange Rate Volatility to Persist as Brexit Speculation Continues

Speculation surrounding Brexit is likely to mount further as the next round of negotiations approaches, to the detriment of GBP exchange rates.

Unless markets see sustained cause to bet on a softer form of Brexit the mood towards the Pound looks set to sour again.

However, as analysts at Nomura noted:

‘The key takeaway for us is that the conditions are just about as good for the UK as they could possibly be.

‘We have long argued that from the UK’s perspective, the best backdrop for Brexit talks would be a strong EU economy (outperforming the UK ideally) and a forward-focused pro-European sentiment re-emerging.

‘This is the exact backdrop we find.

‘This does not guarantee a smooth set of negotiations over coming months and years, but it makes it more likely.

‘We think the EU has every reason to be generous and to put economic interests ahead of political interests – where quite frankly it doesn’t need to worry. We think the trade talks, when we get onto them, will be tough, difficult and may have moments that cause markets to be concerned.

‘But the UK has, by chance, found itself operating against the best possible backdrop to give it a chance of a decent deal.’

If there is found to be some truth behind the reported European Parliament proposal this could limit the downside potential of the GBP/USD exchange rate over the coming days.

Market focus will also fall on the latest UK wage growth data, which may put the Pound under further pressure on Wednesday.

With average weekly earnings excluding bonuses forecast to have held steady at 2.4% on the year in the three months to December the potential for another GBP rally looks a little limited.

Given the Bank of England’s (BoE) long-running concern over the wage squeeze, and with inflation set to outpace wages for some time to come, a weaker showing here could dent Sterling sharply.

On the other hand, though, an upside surprise may be enough to boost the GBP/USD exchange rate sharply.

Hawkish Fed Minutes Forecast to Support USD Exchange Rates

Demand for the US Dollar could ease, however, as markets brace for the release of the Federal Open Market Committee’s (FOMC) January meeting minutes.

Even though investors are expecting to see confirmation that policymakers are preparing to raise interest rates again imminently USD exchange rates are still likely to lose ground on Wednesday.

Unless the minutes prove even more hawkish in nature than anticipated the US Dollar may struggle to find any fresh upside potential, with markets already having priced in high odds of a March rate hike.

Some additional support could be in store for USD exchange rates, though, if Thursday’s jobless claims data points towards a further tightening of the domestic labour market.

So long as the world’s largest economy continues to demonstrate signs of strength the GBP/USD exchange rate is unlikely to find any significant gains.

If concerns over the prospect of a trade war between the US and China continue to build this is likely to shore up USD exchange rates, with the safe-haven US Dollar benefitting from any jitters in global stock markets.

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TAGS: Pound Dollar Forecasts