GBP/USD Exchange Rate Flat on Uncertainty about Brexit Transition, US Trade Tariffs

March 23, 2018 - Written by Frank Davies

STORY LINK GBP/USD Exchange Rate Flat on Uncertainty about Brexit Transition, US Trade Tariffs

On Thursday, the Pound to US Dollar exchange rate fell from an opening level of 1.4156 in the morning to close down lower around 1.4111 by the evening.

The day’s main news was that the Bank of England (BoE) had left UK interest rates unchanged at 0.5%, but that there could be a rate hike as early as May 2018.

Providing a detailed assessment of the event and a forecast of how the BoE could act in the future, Kallum Pickering of Berenberg Bank said;

‘The Bank of England seems to be re-opening the playbook it used ahead of the November 2017 rate hike.

Step one, signal to markets that a hike could come soon. Step two, let a couple of known hawks dissent in a policy vote shortly thereafter. Step three, hike rates.

After signalling at the February 2018 Inflation Report that a rate hike could come soon, the minutes of the March Monetary Policy Committee meeting published today showed two members of the nine member Monetary Policy Committee, Saunders and McCafferty, both known hawks, voted in favour of raising the Bank Rate by 25bp to 0.75%.

These are the same members that dissented ahead of the November hike.

The March minutes strengthen the bank’s February guidance that a hike could come soon. The real question is, when will it happen?

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We expect the BoE to hike its Bank Rate by 25bp four times over the next two years, with two hikes in 2018 and two in 2019.

This would take the Bank Rate to 1.5% by the end of 2019. We look for the next 25bp hike in May 2018’.

Despite this relatively hawkish outlook, the Pound’s subsequent decline against the US Dollar was due to uncertainty over whether the BoE’s actions would match with forecasts.

The US Dollar strengthened thanks to a Federal Reserve interest rate hike on 21st March, although losses were caused late in the day when trade tariffs were announced against China.

It had widely been expected that President Donald Trump would enact trade tariffs on the world’s second-largest economy, but the confirmation still triggered panic among global markets.

After the announcement, Mike Jakeman of the Economist Intelligence Unit warned that;

’There is a lot riding on China’s response. The US is gambling that any response will be proportionate.

China could hit the US hard in return, by making access to the local market harder for US farmers, for example.

Were farmers faced with falling prices for the exports and higher prices at home because of the import tariffs, the popularity of the tariffs would diminish quickly.

This is a high-risk strategy for the US administration and one that is likely to weaken, rather than strengthen, the global economy’.

Pound to US Dollar Exchange Rate Tight after Brexit Transitional Deal Agreement

The Pound to US Dollar exchange rate (GBP/USD) has been close on 23rd March, following the news that EU leaders have provisionally approved the Brexit Transitional Deal.

The arrangement was struck on Monday this week but has now tentatively been given a green light by EU leaders.

Problematically, however, the arrangement still needs to involve a resolution regarding the Irish border after Brexit, as well as the British overseas territory of Gibraltar.

US Dollar to Pound Exchange Rate Movement Limited by US Trade War Fears

Although the US Dollar has made minimal gains against the Pound today, the USD has been broadly constrained by background concerns about the US’s new trade tariffs against China.

USD traders are concerned that the charges, which will target up to $60bn of Chinese imports into the US, pose a serious risk of sparking a ‘tit-for-tat’ trade war between the two nations.

Pound to US Dollar Exchange Rate Forecast: Risk of GBP/USD Decline on Slowing UK GDP

The Pound to US Dollar exchange rate could see a sharp drop in the coming week, when finalised UK GDP growth stats for Q4 2018 will be released.

The figures, out on 29th March, are expected to show a slowdown in both quarter-on-quarter and year-on-year levels of economic growth in the UK.

On the other side of the pairing, the US Dollar could be weakened by any signs that China will be taking immediate retaliatory action towards the US over its trading tariffs.

Economists have warned that these early skirmishes could escalate over time, with US and Chinese industries and consumers increasingly getting caught in the economic crossfire.

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TAGS: Pound Dollar Forecasts