GBP to USD Exchange Rate Advances as US Political and Trade Uncertainties Continue to Weigh

March 26, 2018 - Written by James Fuller

STORY LINK GBP to USD Exchange Rate Advances as US Political and Trade Uncertainties Continue to Weigh

Despite market hopes that the US was beginning talks with China over trade in efforts to avoid a ‘trade war’, the British Pound to US Dollar (GBP/USD) exchange rate continued to climb on Monday. The Pound continued to be supported by last week’s Brexit and Bank of England (BoE) news.

Thanks to the Brexit and BoE developments last week, GBP/USD surged from 1.3946 to 1.4130. GBP/USD continued to climb when markets opened on Monday and the pair briefly touched on a high of 1.4231 in the middle of the day. This was the pair’s best level since the beginning of February.

GBP Continues to Find Support in Higher Bank of England (BoE) Interest Rate Hike Bets

The Pound continued to see relatively firm support when markets opened on Monday, as investors remained more optimistic about the British currency’s outlook and the UK economic outlook thanks to last week’s news.

The biggest development last week was the agreement between UK and EU negotiators over the terms of a post-Brexit transition period.

With a transition period now more or less a done deal, markets are far less anxious about the possibility of the Brexit process ending in a ‘cliff edge’ hard Brexit scenario.

Hopes for a smooth and orderly Brexit process also left investors speculating that the Bank of England (BoE) was more likely to take a hawkish tone on UK monetary policy within the coming year.

Traders bet that the BoE would now be pressured into hiking UK interest rates again as soon as May 2018, and May interest rate hike bets only strengthened further when UK wage growth and retail sales stats beat expectations last week.

As a result of the Brexit news and stronger UK data, investors were largely unsurprised when the BoE indicated in its March policy decision meeting minutes that it was preparing to hike UK interest rates in the coming months.

With a May interest rate hike from the BoE now largely priced in and the perceived possibility of a ‘hard Brexit’ lighter, Sterling support is much stronger since last week and this is helping it to sustain gains against the weak US Dollar.

USD Support Weak as Investors Remain Concerned about ‘Trade War’ Possibility

Investors were seemingly unconvinced by reports that the US and China had entered talks in attempts to reach agreements on trade and avoid a ‘trade war’.

With the US and China escalating strict trade rhetoric to each other last week, the US Dollar was largely unappealing amid concerns that retaliation from China or a ‘trade war’ could negatively impact the US economy.

The lack of market bullishness on the US Dollar weighed on equities on Monday too, according to Mike van Dulken from Accendo Markets;

‘Equities have started the week on the front foot, with reports of US-China talks helping ease the trade war fears which pushed equities lower last week, as well as Trump signing rather than vetoing a US government spending bill. That said, US Dollar weakness, and thus Pound and Euro strength, is keeping equity bullishness in check, holding indices from breaking back above key levels, to inspire confidence in a turnaround.’

On top of this, US political jitters have weighed on US Dollar trade too. Recent staff shuffles of top jobs at the White House have left investors anxious.

GBP/USD Forecast: Final Q4 Growth Results Ahead for UK and US

US trade news is likely to remain a big focus for US Dollar exchange rate investors this week. If investors remain anxious about the possibility of a ‘trade war’, Sterling could remain more appealing than the US Dollar and GBP/USD could see further gains.

The Pound to US Dollar (GBP/USD) exchange rate could be influenced by domestic data in the coming sessions too, particularly key Gross Domestic Product (GDP) results.

The final Q4 2017 growth results for the US will be published on Wednesday. US growth is currently projected to have slowed from 3.2% to 2.7% quarter-on-quarter.
UK growth results will follow on Thursday. Quarterly growth is projected to have slowed from 0.5% to 0.4%, with yearly growth expected to slide from 1.8% to 1.4%.

UK business investment data will also be published on Thursday, as well as US Personal Consumption Expenditure (PCE) inflation data in the afternoon.

PCE is the Federal Reserve’s preferred measure of US inflation, so there will be plenty of notable data for GBP/USD investors to digest in the late-week.

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TAGS: Pound Dollar Forecasts