August 8, 2018 - Written by Ben Hughes
STORY LINK GBP to USD Exchange Rate Tumbles Further as No Deal Brexit Fears Dominate Trade
While there have been no UK economic developments this week so far, the British Pound to US Dollar (GBP/USD) continues to be sold largely on worsening market fears that the UK could leave the EU with a ‘no deal’ Brexit – often seen as a worst-case scenario by economists.
Following last week’s fall from 1.3103 to 1.3001, GBP/USD could be in for another week of solid losses. Not only did GBP/USD fall to 1.29 earlier in the week, but on Wednesday GBP/USD slumped again and hit a low of 1.2858. This was the lowest GBP/USD level in almost a year, since late-August 2017.
GBP Continues to Fall as ‘No Deal’ Brexit Fears Dominate Sterling Speculation
Despite a lack of fresh Brexit developments in recent sessions, market fears that the UK could leave the EU without any kind of deal persisted on Wednesday and saw the Pound selloff continue.
Essentially, investors are selling the Pound on the expectation that Brexit concerns may actually worsen in the coming months, particularly as there aren’t expected to be any major Brexit developments until October.
According to Jordan Rochester from Nomura, this bearish Sterling performance may actually continue until October’s EU summit:
‘We remain bearish on the Pound in the short term until the Brexit mess is out the way and look for the currency to enter a $1.27-1.28 range before the leaders summit.’
Investors are also anxious that the Bank of England (BoE) may actually cut UK interest rates in its next decision if the Brexit outlook doesn’t improve or UK data doesn’t show that last week’s rate hike was justified.
According to Jeremy Stretch from CIBC:
‘…unless the economic data in the UK starts to validate the rise in interest rates, it's hard to see the Pound regaining any strength.’
USD Continues to See Support on Solid US Economic Outlook
While the US Dollar’s recent bullish streak has slowed, the currency remains appealing overall due to market expectations that the US economy will continue to perform strongly and that the Federal Reserve
will continue to hike US interest rates.
Wednesday’s US data wasn’t hugely influential, but was relatively consistent with expectations and had no notable impact on the US Dollar outlook either.
The US Dollar was also little-influenced by the day’s news that China had announced to counter US trade tariffs with its own tariffs on Chinese imports of US goods.
Demand for the US Dollar may have been supported slightly by Wednesday’s comments from Richmond Federal Reserve President Thomas Barkin.
Barkin said the strength of the US economy meant that interest rates would need to keep being hiked. He said:
‘It is difficult to argue that lower than normal rates are appropriate when unemployment is low and inflation is effectively at the Feds target,’
GBP/USD Forecast: UK Growth and US Inflation Stats on Friday
Unless there are surprising developments in Brexit or US trade stances, the Pound to US Dollar exchange rate is unlikely to see much shift in direction on Thursday.
The US Dollar is likely to remain generally appealing due to the solid US economic outlook, and the Pound is likely to remain weak due to persistent ‘no deal’ Brexit fears.
US wholesale inventories data from June and PPI data from July could influence the US Dollar slightly if it surprises investors, but it’s more likely that investors will anticipate Friday’s key UK and US ecostats.
Friday will see the publication of Britain’s latest Gross Domestic Product (GDP) growth results, from June and Q2. UK trade results and business investment figures will be published too.
Stronger than expected UK growth results or projections would likely indicate to investors that the Bank of England’s (BoE)
August interest rate hike was justified, which may support Sterling slightly.
However, with Brexit concerns dominating headlines the Pound’s potential for recovery is still limited overall.
US Consumer Price Index (CPI) inflation data will be published on Friday too.
If the inflation figures come in well short of expectations they could weigh on Federal Reserve interest rate hike bets, but otherwise they are unlikely to have much impact on the Pound to US Dollar exchange rate outlook.
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TAGS: Pound Dollar Forecasts