December 4, 2018 - Written by Tim Boyer
STORY LINK Pound to Dollar Exchange Rate Surges as Market’s Safe Haven Selloff Continues
Since markets opened this week, the British Pound to US Dollar (GBP/USD) exchange rate has seen mixed movement as Brexit news keeps Sterling volatile. However, the US Dollar’s weakness on market demand for riskier currencies persisted today and made it easier for the pair to advance again.
Despite slightly lower market safe haven demand, GBP/USD slipped around half a cent last week from 1.2821 to 1.2750. This week so far, GBP/USD has fluctuated. GBP/USD touched a three month low of 1.2705 on Monday, but at the time of writing on Tuesday was trending near the level of 1.2846 following a sharp Tuesday morning recovery.
GBP Exchange Rates Rebound on Slight ‘No Brexit’ Speculation
The chances of the Brexit process being entirely reversed and Britain remaining within the EU are still seen as highly unlikely.
However, market bets on the possibility have risen lately due to the UK-EU Brexit deal’s lack of domestic popularity and the instability of UK Prime Minister Theresa May’s government.
On Tuesday, European Court of Justice (ECJ) Advocate General Manuel Campos Sanchez-Bordona suggested that the UK would be able to reverse Article 50 would be simple, and that the exiting process itself is non-binding.
Until the UK has formally left the EU, the Advocate General said ‘the possibility continues to exist’ that Article 50 could simply be reversed.
While the negotiated UK-EU Brexit deal’s lack of domestic support continues to make Pound investors anxious, the idea that reversing Article 50 would be easy if the government somehow changed course supported Sterling.
According to Jordan Rochester, analyst at Nomura International Plc.:
‘The Pound is really taking the Article 50 news well,
Sterling had been trading on the soft side due to concerns about the vote and how Labour plan to table a vote of no confidence if or when it falls through. This doesn’t change that, but the market had gotten overly short.’
The comments overshadowed the latest concerning domestic news, that UK Parliament now faced a vote on whether the UK government should be held in contempt of Parliament for refusing to publish its Brexit legal advice.
USD Exchange Rates Slide as US Treasury Yields Fall
Overnight, two-year US Treasury yields rose above the longer-dated 5-year Treasury yields for the first time in over a decade, as longer-term yields were sold.
Rising interest rates from the Federal Reserve
sent short-dated yields higher, but longer-dated yields have recently been pressured by expectations for slower US inflation and economic growth looking ahead.
It marked the first time since the 2007 financial crisis that there had been a so-called ‘inversion’ of the yield curve. To many analysts and investors it acted as the latest warning sign that the US economy could be about to slow down.
According to Esther Reichelt, FX Strategist from Commerzbank:
‘Clearly investors think the Federal Reserve is going to become more cautious and data dependent with rate hikes. We are basically approaching the end of the rate hiking cycle. That is negative for the dollar,’
The news caused the US Dollar to break below key resistance levels, continuing this week’s selloff that begun in reaction to the announced trade truce between the US and China.
Investors have been selling safe haven currencies like the US Dollar amid rising demand for risk-taking, now that US-China trade war fears are on hold for the time being.
GBP/USD Exchange Rate Forecast: Brexit Developments and US Data Could Influence Movement
The US Dollar could be in for further selloffs, as safe haven currencies continue to lose their shine amid the US-China trade truce and markets continue to digest expectations for slower US growth in the coming years.
Sterling may struggle to capitalise on the US Dollar’s weakness however, as Brexit fears persist and are likely to keep a firm cap on the Pound’s advance potential.
Perceived domestic support for the UK-EU Brexit agreement, as well as speculation on how the process may unfold in the event that the bill is blocked, are likely to drive the Pound in the coming sessions.
Upcoming US data may give the US Dollar some more solid support if it impresses investors.
Wednesday will see the publication of US non-manufacturing PMI data for November from ISM, followed by trade balance stats on Thursday and Non-Farm Payroll data on Friday.
This week’s UK data includes UK services PMI stats on Wednesday, but they are unlikely to be significantly influential for the Pound to US Dollar exchange rate as Brexit developments remain in focus.
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TAGS: Pound Dollar Forecasts