Dollar to Pound Exchange Rate Recovery Limited by Underwhelming US Inflation and Brexit Jitters

March 12, 2019 - Written by Toni Johnson

STORY LINK Dollar to Pound Exchange Rate Recovery Limited by Underwhelming US Inflation and Brexit Jitters

Brexit developments in recent sessions have led to broad volatility and fluctuations in the Pound, but the US Dollar to British Pound (USD/GBP) exchange rate’s support has also been limited by poor US data in recent sessions. The pair is likely to remain at the mercy of major Brexit developments in the coming sessions.

Weakness in the Pound was the primary cause of USD/GBP gains last week, as the pair jumped from 0.7571 to 0.7682 throughout the week. After markets opened this week, USD/GBP briefly jumped to a three week of 0.7718 before slumping and shedding all of last week’s gains.

On Tuesday, USD/GBP movement was more mixed as Brexit uncertainties sent the Pound fluctuating. USD/GBP trended closer to the level of 0.7621 at the time of writing on Tuesday afternoon, ahead of the day’s Brexit vote.

Sterling saw big fluctuations throughout today’s European session. Hopes that the Brexit deal could succeed were quickly followed by doubts that recent assurances actually changed anything, weakening the Pound again.

Meanwhile, the US Dollar remained fairly unappealing on disappointing US data that meant USD/GBP was driven largely by Pound movement.

USD Exchange Rates Fails to Find Support as US Inflation Falls Short of Forecasts

Following last week’s strong demand for the US Dollar on the back of safe haven demand and a weaker Pound, investors have found the US currency less appealing since last Friday’s disappointing US Non-Farm Payroll figure.

Far less new US jobs were made than expected last month, and while some analysts said the poor data may have just been a blip it still spooked investors and caused US Dollar weakness.

This was followed on Monday by the latest US retail sales results. While January retail sales data beat forecasts slightly, December’s figures were revised lower showing that US consumer activity was even worse in December than previously thought.

Today’s US data was yet another disappointing set. February’s US Consumer Price Index (CPI) inflation rate results fell short of expectations in every major print.

February’s year-on-year inflation rate unexpectedly slowed from 1.6% to 1.5%, while the core yearly inflation figure slowed from 0.2% to just 0.1%.

In response to the stats, investors became even more doubtful that the Federal Reserve would hike US interest rates again this year. According to Paul Ashworth, Chief US Economist at Capital Economics:

‘The Fed would appear to be justified in supporting the real economy by being patient and leaving interest rates on hold for a potentially extended period,’

GBP Exchange Rates Volatile as Investors Anticipate Brexit Vote

The Pound saw broad fluctuations in movement throughout the day due to market uncertainty over how the week’s upcoming Brexit events would unfold.

At the beginning of the day, the Pound remained near its best levels.

However, as the UK government’s changes to its Brexit plan were analysed and eventually seen as relatively minor, investors sold the Pound and the British currency shed a good chunk of yesterday’s strong gains.

While the Pound’s movement steadied slightly later in the session as investors awaited the evening’s major Brexit vote in Parliament, the British currency still saw notable losses even against a weaker US Dollar for most of the day.

Pound movement was little-influenced by the day’s UK data due to the strong focus on Brexit developments. As a result, Sterling remained unappealing despite stronger than expected January growth data.

USD/GBP Exchange Rate Forecast: Brexit Developments in Focus, US Goods Orders Ahead

Today’s US Dollar to Pound exchange rate movement was driven largely by wide fluctuations in the Pound, as investors speculate and react to developments regarding the Brexit process.

With investors now awaiting UK Parliament’s meaningful vote on the government’s Brexit deal, the fate of the government deal could be about to be decided.

If the deal finds enough support and passes, Sterling would surge as a soft Brexit would essentially be confirmed.

However, analysts perceive this as unlikely, and the Brexit outlook in the event of the deal being blocked again is still filled with uncertainties.

It is seen as likely that UK Parliament will also vote to block a no-deal Brexit in the event the deal is blocked. Following that, Parliament will also likely vote to delay the formal Brexit process later this week.

Following that though, it is unclear how the Brexit process will go next, with the UK government seemingly unable to sufficiently bolster Parliament support for its plan.

Brexit news and the Pound are likely to drive USD/GBP for most of the week, but US durable goods orders stats due tomorrow could also influence the US Dollar to Pound exchange rate as well.

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TAGS: Dollar Pound Forecasts