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GBP to USD Exchange Rate Struggles to Advance Despite Signs of Slower US Growth

December 21, 2018 - Written by Frank Davies

Broad US Dollar weakness this week has made it easier for the British Pound to US Dollar (GBP/USD) exchange rate to advance, but Brexit uncertainties and some lingering market demand for safe haven currencies kept the pair from advancing too high. US data is likely to drive GBP/USD movement next week amid a lack of expected Brexit developments until the New Year.

Since opening this week at the level of 1.2588, GBP/USD has trended with an upside bias and spent most of the week edging higher. After touching on a weekly high of 1.2703 on Thursday, GBP/USD’s gains moderated and the pair trended nearer the level of 1.2650 on Friday afternoon.

GBP Exchange Rate Strength Limited by Broad Brexit Uncertainties

Sterling saw one of its best weeks of December last week, but the British currency’s appeal was limited as the Brexit process still lacked clarity and economists don’t expect any fresh notable Brexit developments until the New Year.

Market anxiety surrounding the Brexit process has not lightened at all this month, despite previous hopes that the UK would have a more solid idea of how the Brexit process will unfold by the end of 2018.

Instead, UK MPs appear unable to agree on how the Brexit process should conclude. UK Prime Minister Theresa May’s negotiated UK-EU Brexit deal has failed to find enough support, and the UK Parliament vote on the deal has been delayed into January 2019.

While UK MPs from the Conservative and Labour parties ramped up attempts to avert a worst-case scenario ‘no-deal Brexit’, fears of Britain crashing out of the EU persist and keep pressure on Sterling.

The Pound was unable to benefit from Friday’s mixed UK ecostats either.

Britain’s final Q3 Gross Domestic Product (GDP) growth rate stats met projections. The figures improved on Q2’s figures but did little to make investors more optimistic about the Brexit process.

The same could be said for Britain’s Q3 business investment results, which actually bat expectations slightly. The yearly figure came in at -1.8% rather than the projected -1.9%, but as the data still printed a strong contraction it remained concerning to investors.

UK consumer confidence worsened from -13 to -14, its worst print in 5 years. The fact that this figure met expectations did little to change how gloomy it was. According to Chris Ralph from St James’s Place (SJP):

‘I wish I could bring glad tidings of great joy, but failing miserably,

Consumer confidence is falling. It's now lower than it was at the time immediately following the referendum vote. Car sales have fallen. Consumers are clearly being worried by the prospect of a no-deal Brexit.’

USD Exchange Rate Recovery Limited as US Growth Falls Short

The Pound was ultimately on track to end the week higher versus the US Dollar, as many domestic factors left the US Dollar unappealing towards the end of the week.

On Wednesday, the Federal Reserve spooked investors by being less cautious about slowing global growth than economists had suggested.

It led to concerns that US interest rates could rise too high before the Fed pauses its interest rate hike cycle. If interest rates get too high, investors fear it could damage the US economy in some way.

Analysts continued to express concern about the Fed’s unexpectedly hawkish tone in the following days. On Friday, analysts at Capital Economics said:

‘The clear view in financial markets in the wake of the December FOMC meeting is that any further rate hikes over the coming months are likely to be reversed in 2020.

Our long-held forecast is that a sharp slowdown in economic growth next year will prompt the Fed to cut rates by 75bp in the first half of 2020, more than markets are currently pricing in.’

Concerns about the bank outlook only worsened on Friday when the latest US growth rate data came in slightly weaker than expected.

Investors sold the US Dollar on Federal Reserve interest rate jitters and concerns of slowing US and global growth.

GBP/USD Exchange Rate Forecast: US Data in Focus as UK Parliament Breaks for Christmas

Next week’s UK economic calendar will be quiet, with US markets closed for much of the week to observe festive bank holidays.

UK Parliament is also on break for its winter recess, meaning there is unlikely to be any significant development in UK politics or Brexit until it reconvenes in the New Year.

As a result, Sterling movement is likely to remain volatile with investors anxious amid persistent Brexit uncertainty.

This means GBP/USD is more likely to be driven by US data throughout the week.

Chicago Fed national activity index data will come in on Monday, followed by Richmond Fed manufacturing data on Wednesday.

US jobless claims, CB consumer confidence, and new home sales figures will be published on Thursday. Friday will round the week off with US Chicago PMI, wholesale inventories and pending home sales.
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