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GBP to USD Exchange Rate Recovery from 2018 Lows Slows as Brexit Retakes Focus in UK Politics

December 13, 2018 - Written by Ben Hughes

Despite Wednesday evening’s news that UK Prime Minister Theresa May had successfully seen off a no confidence vote from her Conservative Party, the British Pound to US Dollar (GBP/USD) exchange rate struggled to recover much further on Thursday. Instead, the US Dollar was supported slightly by the latest US data.

Since opening this week at the level of 1.2728, GBP/USD has trended with a downside bias due to Brexit jitters. Concerns about UK Prime Minister May’s leadership have lightened, but Brexit jitters persist. GBP/USD briefly hit a 2018 low of 1.2482 on Tuesday night, before recovering yesterday and trending closer to the level of 1.2636 at the time of writing on Thursday.

GBP Exchange Rates Recovery Limited by Persistent Brexit Uncertainties

GBP/USD was unable to hold all of its recovery attempt on Thursday, as Brexit jitters weighed on the Pound’s recovery potential.

While UK Prime Minister Theresa May successfully survived a no confidence vote triggered against her by her Conservative Party on Wednesday, much of this week’s UK political uncertainties persist and show no signs of fading.

117 Conservative Party MPs, over a third of the party, voted against Prime Minister May. Some of these backbenchers, who support a hard Brexit, indicated they would continue in attempts to stop Prime Minister May’s Brexit plan from passing UK Parliament.

The relative lack of popularity for the Prime Minister as well as her negotiated Brexit plan within her own party has left her with little hope of passing the plan through UK Parliament.

Analysts believe it is unlikely that the EU will be able to offer PM May any kind of major concession or assurance that would notably improve the popularity of her plan.

According to Ed Al-Hussainy, Senior Currencies and Rates Analyst at Columbia Threadneedle Investments, there just hasn’t been enough good news for the Pound:

‘It failed to rally on the news,

When you see a dynamic like that, it means the good news is priced in. We don’t have another slug of good news, so I think that means that some people will just take profit.’

Masafumi Yamamoto, Chief Currency Strategist at Mizuho Securities, said investors were aware that core Brexit uncertainties were far from resolved:

‘Just after the actual result was announced, profit-taking dominated, (but) Sterling stopped appreciating,

That shows it's not bad news, but it doesn't fix the Brexit issue. In that sense, uncertainty continues.’

USD Exchange Rates Supported by US Jobless Claims Report

Following the most recent US Non-Farm Payroll results, investors had become concerned that the US job market was seeing weakness as the year drew to an end.

This weighed on market expectations for a solid US economic outlook and Federal Reserve interest rate hike bets.

As a result, the US Dollar found some support on Thursday when the latest US jobless claims report was published and came in better than analysts expected.

Jobless claims were forecast to come in at 225k, but instead slowed to just 206k. This indicated that less people than expected were unable to find jobs.

However, the number of continuing jobless claims was higher than expected at 1661k. This, as well as November’s contractions in US import and export prices, limited the US Dollar’s Thursday strength.

On top of this, fresh optimism towards US-China trade relations this week have made investors hesitant to buy safe haven currencies like the US Dollar.

Essentially, the Pound to US Dollar exchange rate’s strength is limited by Brexit uncertainties, but the US Dollar was unable to capitalise on the Pound’s fading strength.

GBP/USD Exchange Rate Forecast: US Retail and PMI Projections Ahead

Unless there are notable developments regarding the Brexit process tomorrow, the Pound to US Dollar exchange rate is more likely to react to upcoming US ecostats before markets close for the week.

Friday will see the publication of November’s US retail sales results, as well as industrial and manufacturing production stats from November.

Markit’s US PMI projections for December will be published on Friday too, and could give investors a better idea of how the US economy is performing towards the end of the year.

If Friday’s US stats beat expectations, they could make investors more confidence in the resilience of the US economy. This could even boost Federal Reserve interest rate hike bets slightly and leave the US Dollar stronger.

Of course, political developments will remain influential for the Pound to US Dollar exchange rate too.

Signs that UK Prime Minister Theresa May could succeed in making her negotiated UK-EU Brexit deal more popular would bolster Pound demand.

However, if there are any fresh developments in UK politics or the Brexit process, the Pound to US Dollar exchange rate could shed some of its recent gains.
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