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GBP to USD Exchange Rate Slumps on Mixed Brexit Reports

November 12, 2018 - Written by Frank Davies

A surprisingly resilient US Dollar avoided losses versus the Pound last week despite the results of the US Mid-Term Elections, and the British Pound to US Dollar (GBP/USD) exchange rate continued to fall when markets opened this week as Brexit concerns returned to UK headlines.

Last week saw GBP/USD open at the level of 1.2973 and close at the level of 1.2973 as the Pound’s early-week gains were written off. On Wednesday, GBP/USD briefly touched a three week high of 1.3166 before shedding its weekly gains. So far this week, GBP/USD has slumped, briefly touching a low of 1.2831 before trending closer to the level of 1.2892 at the time of writing.

GBP Fails to Advance Despite Signs of Progress in Brexit Negotiations

Sterling movement became much more volatile on Monday, as mixed reports on the status of Brexit negotiations and how the deal would be received across the EU and UK left investors even more uncertain.

Investors sold the Pound against stronger rivals, such as the safe haven US Dollar, in reaction to reports claiming that UK Prime Minister Theresa May’s own government Cabinet wasn’t confident that May’s Brexit plan would be able to pass through UK Parliament.

May’s so-called Brexit ‘Chequers plan’ has seen significant criticism from within her own Conservative Party since it was revealed earlier in the year.

It led to concerns that even if a UK-EU Brexit deal is reached by negotiators, the plan may struggle to pass into UK law if it faced too many obstacles from opposition parties and from within the Conservative Party itself.

This report only worsened those concerns, as well as concerns about the stability of PM May’s leadership. According to John Whittingdale, former UK cabinet minister:

‘I think if the PM's Brexit plan doesn't get through Parliament, I think it's quite difficult to see how the Prime Minister can continue because she has staked her credibility,’

Other Monday reports only added to the latest Brexit uncertainties.

While one report indicated that officials were losing hope that a UK-EU deal could be formed by the end of November amid a lack of agreement on the issue of Northern Ireland’s border, another was more optimistic.

Reportedly, EU Chief Negotiator Michel Barnier has said that the main text of the Brexit treaty is ready to present to the UK government.

Still, other uncertainties, especially concerns that UK Parliament could block a Brexit deal from passing into law, prevented the Pound from recovering too much on this news.

USD Appeal Persists amid Safe Haven Demand and Federal Reserve Hawkishness

Despite a lack of fresh influential US data on Monday, the US Dollar was able to easily push the Pound lower thanks solid fundamental support for the US currency.

In fact, some of the Pound’s Monday weakness was due to the US Dollar’s pervasive strength. According to Simon Derrick from Bank of New York Mellon, the Pound’s weakness was:

‘obviously related to the uncertainty over the weekend

At least half of it is actually about Dollar strength and the expectation that the Federal Reserve will hike interest rates in December.’

Last week’s Federal Reserve policy decision helped boost the US Dollar, helping it to recover much of the ground it lost as a result of the US Mid-Term Election results.

Despite news that US President Donald Trump’s ability to pass new legislation was dented by a Democratic Party-controlled House of Congress, the Fed’s hawkish policy outlook seemed unchanged.

GBP/USD Forecast: Brexit Developments Remain in Focus

With the Pound highly volatile on Monday’s mixed Brexit reports, and speculation that the UK and EU could reach some kind of agreement in the coming sessions, Brexit news is likely to remain in focus on Tuesday.

While some notable UK data will be published tomorrow, including UK job market data, investors may well brush over the data if there are any notable Brexit developments of any kind.
In fact, Tuesday’s US data is unlikely to be particularly influential either.

US NFIB business optimism data from October, and October’s US consumer inflation expectations report could cause some US Dollar movement, but the US currency is more likely to be moved by potential shifts in Sterling or safe haven demand.
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