GBP/USD Slides Lower as US Labour Market Demonstrates Fresh Signs of Tightening

May 17, 2018 - Written by Tim Boyer

STORY LINK GBP/USD Slides Lower as US Labour Market Demonstrates Fresh Signs of Tightening

Speculation over Brexit continued to weigh on the Pound US Dollar (GBP/USD) exchange rate on Thursday, with markets unsettled by conflicting reports on the prospect of continued customs union membership.

Confidence in the US Dollar, meanwhile, picked up in response to a sharp surprise uptick in May’s Philadelphia Fed business outlook index.

As the measure leapt from 23.2 to 34.4 this encouraged investors to pile into the US Dollar, improving optimism in the underlying health of the world’s largest economy.

With global geopolitical risk remaining elevated as companies prepare to withdraw from Iran in response to the Trump administration’s looming sanctions this helped to support USD exchange rates.

Brexit Uncertainty Increases Pressure on Pound US Dollar Exchange Rate

Although reports emerged suggesting that the UK government is willing to remain a member of the customs union until at least 2021 in order to avoid a hard Irish border this failed to boost the Pound for long.

Prime Minister Theresa May was quick to contradict the reports, reiterating the intent to withdraw the UK from the customs union as a part of the Brexit process.

This left GBP exchange rates under renewed pressure on Thursday as investors took little heart from this latest development, which simply helped to highlight the persistent divisions within May’s cabinet.

Analysts at Rabobank noted:

‘This morning conflicting headlines will serve to underpin the impression of a lack of coordination within the PM’s cabinet. Not only must May bridge the gap between her deeply divided cabinet but she must resolve the seemingly impossible N. Ireland puzzle. Although May wants to be out of the customs union, she has made a strong commitment to the government of Ireland that there will be no hard border and has promised the DUP, on which she relies for support in parliament, that the border will not be shifted into the sea.’

Confidence in the outlook of the UK economy thus remains rather muted, particularly in the absence of any supportive domestic data.

Markets see little cause for confidence in the domestic outlook, as Tim Riddell, research analyst at Westpac, commented:

‘The latest BoE Agents’ Report did show positives for manufacturing and exports. However, the retail & services sectors (majority of the economy) are faltering and their investment intentions are stalling while turnover and values are slumping in early Q2 18. CBI trends, inflation and retail sales releases next week are now of increasing interest.

‘Brexit concerns are mounting, not waning (cited a key problem in BoE Agents’ Report and MPC minutes). PM May is failing to unite her Cabinet, let alone Parliament, for credible customs and Irish border proposals. A proposed White Paper may assist, but divisions and political vulnerability remain in front of the late-June EU Leaders Summit.’

Unless there are signs that the government is reaching a consensus on the shape of the post-Brexit UK the appeal of the Pound is likely to remain limited in the coming days.

Hawkish Fed Commentary Forecast to Weigh on GBP/USD Exchange Rate

A larger-than-expected dip in US continuing jobless claims also helped to buoy the US Dollar on Thursday, indicating that the domestic labour market is continuing to tighten.

Although there was a modest uptick in initial jobless claims this was not enough to counter the improvement in long-term jobless benefit claims.

This could give the Federal Reserve further cause for confidence in the months ahead, potentially paving the way for a more aggressive pace of monetary tightening.

Ahead of the weekend the GBP/USD exchange rate could come under additional pressure in response to commentary from Fed policymakers.

If speakers opt to take a more hawkish tone this is likely to encourage the US Dollar to push higher across the board.

As long as investors see reason to bet on the prospect of the Fed raising interest rates three more times before the end of the year the downside potential of USD exchange rates looks set to remain limited.

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TAGS: Pound Dollar Forecasts