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GBP to USD Exchange Rate Tumbles as Trade Uncertainties and Fed Bets Boost Dollar

November 27, 2018 - Written by Toni Johnson

Fresh comments from US President Donald Trump, as well as new Federal Reserve interest rate hike bets, were the primary causes of British Pound to US Dollar (GBP/USD) exchange rate movement on Tuesday. However, the US Dollar’s appeal was limited by mixed US consumer confidence data and lingering risk-sentiment.

While GBP/USD only slipped slightly last week overall, this week’s losses have already been sharper so far. GBP/USD opened this week at the level of 1.2821 and slipped slightly on Monday, before seeing sharper losses of around half a cent on Tuesday. GBP/USD briefly trended near a three month low of 1.2732 on Tuesday afternoon.

GBP Sold Following Trump’s Brexit Deal Comments

Since the weekend, there has been little in the way of major Brexit developments – but Pound investors remain highly anxious about the future of the UK-EU Brexit bill.

On Sunday, the negotiated UK-EU Brexit deal was successfully finalised, leaving the final and potentially biggest obstacle of UK Parliament as the final stop of the Brexit process.

As markets are doubtful that there is enough support among UK MPs to pass the bill through Parliament, the bill’s presumed failure to be passed first try has been largely priced into the Pound already.

UK Prime Minister Theresa May faced opposition on her plan from within her own Conservative Party, as well as Northern Ireland’s Democratic Unionist Party (DUP) – which is allied with the Conservatives.

Amid a lack of support among allies, the Pound’s demand has been limited.

Sterling became even weaker on Tuesday, as US President Donald Trump noted the agreed UK-EU Brexit plan meant the UK was unlikely to be able to negotiate independent trade deals with the US.

UK officials attempted to reassure that independent trade deals could still be forged, but separate comments from UK ex-defence Secretary Sir Michael Fallon put even further pressure on Sterling:

‘My fear is that this deal gives us the worst of all worlds,

No guarantee of smooth trade in the future and no ability to reduce the tariffs that we need to conclude trade deals with the rest of the world.

So, unless the House of Commons can be persuaded somehow that those are possible then I think, yes, the deal is doomed.’

His comments worsened concerns that the deal may not pass even with small amendments, and also worsened concerns about the stability of UK Prime Minister Theresa May’s leadership.

USD Benefits from Risk-Off Movement and Fed Bets

Despite some lingering demand for risky trade-correlated currencies, US-China trade tensions appeared to worsen again on Tuesday which ultimately left investors doubtful that there would be a de-escalation any time soon.

This weighed on the market appetite for taking risks and bolstered the outlook of safe haven currencies like the US Dollar.

On top of this, the US Dollar was bolstered further in response to hawkish comments from Federal Reserve Vice Chair Richard Clarida.

Clarida indicated that if US data continues to beat expectations, Federal Reserve interest rates could head even higher before the Fed ends its interest rate hike cycle.

However, the US Dollar’s Tuesday strength was limited by news that US consumer confidence had fallen short of expectations in November – according to CB’s new report.

Analysts at Capital Economics noted that the data highlighted some concerns for the US economic outlook:

‘Although they have generally picked up over the past couple of months specifically, the shares of respondents planning to buy a home, motor vehicle or major appliance remain lower than their 2017 peaks.

That shift in sentiment is already showing up in weaker housing activity, and we suspect it won’t be long before that weakness starts to spread to other rate-sensitive sectors of the economy.’

GBP/USD Forecast: US Growth and Geopolitical Developments Remain in Focus

While the Bank of England’s (BoE) latest stress test results will be published on Wednesday, these are unlikely to be hugely influential unless they surprise investors.

Instead, the Pound to US Dollar exchange rate will remain focused on potential Brexit developments, as well as US-China trade tensions and US data.

If concerns about the lack of UK support for the Brexit bill worsen, the Pound is likely to see further losses.

The US Dollar, on the other hand, is likely to strengthen as US-China trade jitters leave investors hungrier for safe haven currencies.

Wednesday’s US data has the potential to be highly influential too. US Gross Domestic Product (GDP) growth data, new home sales and PCE prices data will be published and could influence the Pound to US Dollar exchange rate.
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