Pound to US Dollar Exchange Rate Tumbles from Best Conversion in one Month as Investors Avoid Taking Risks

May 8, 2019 - Written by Tim Boyer

STORY LINK Pound to US Dollar Exchange Rate Tumbles from Best Conversion in one Month as Investors Avoid Taking Risks

Following last week’s impressive and solid British Pound to US Dollar exchange rate gains, GBP/USD tumbled on a combination of British political uncertainties and higher market demand for safe haven currencies like the US Dollar. Still, the US Dollar’s appeal is limited amid concerns that US-China trade tensions could negatively hit the US economy.

After opening last week at the level of 1.2915, GBP/USD put in solid gains throughout the week and closed the week at the level of 1.3172. This was close to the best GBP/USD level since March, 1.3176.

Since then though, GBP/USD has tumbled again and at the time of writing today was trending closer to the level of 1.2998, having shed more than half of last week’s impressive gains.

The US Dollar’s gains would have been stronger if recent US data was more impressive, but the pair is still unlikely to return to those highs again without a jump in Pound demand.

Pound Sterling (GBP) Exchange Rates Unappealing on Doubts for Brexit Breakthrough

Last week saw investors piling into the Pound, as comments from UK officials fuelled speculation that the government and opposition Labour Party were getting closer to reaching a solution in cross-party Brexit talks.

Hopes that a Brexit deal could be reached promptly and lead to a successful soft Brexit without the need for likely contentious European elections briefly made Pound investors bullish, but those hopes have been doused this week so far.

As UK Deputy Prime Minister David Lidington confirmed that Britain would be taking part in the EU’s elections this month, hopes for a prompt deal were put out and the Pound shed some of last week’s impressive gains.

There are concerns about how the EU elections will impact domestic politics, as the ruling Conservative Party is polling poorly and Prime Minister Theresa May continues to see pressure to step down.

On top of this, speculation has risen that the Labour Party is going to become more focused on the EU elections rather than the cross-party talks.

Analysts, already doubtful that the cross-party talks were going to lead anywhere, predict further political uncertainty leading to Pound weakness. According to analysts from ING:

‘The announcement that the UK will take part in European elections confirms that cross-party Brexit talks aren't going anywhere fast. This also refocuses attention on a leadership challenge to May. Favour the Pound to "$1.2950”,’

US Dollar (USD) Exchange Rates Benefit from US-China Trade Hopes and Safe Haven Demand

The US Dollar was in a fairly unique position during today’s trade session, as investors piled into safe haven currencies due to concerns about worsening US-China trade relations.

The US Dollar is safe haven currency and typically benefits from rises in market uncertainty and risk-aversion. However, concerns about how the US economy may be impacted by a US-China trade war limited the US Dollar’s strength for most of the day.

Towards the end of the session though, the day’s US-China trade jitters lightened due to fresh comments from US President Donald Trump.

Trump claimed that Chinese officials were coming to the US to ‘make a deal’ on trade. While it was already known that Chinese officials would visit the US for trade talks, Trump’s optimistic tone on talks contrasted a more pessimistic tone taken earlier in the week.

While other safe haven currencies like the Japanese Yen (JPY) remained more appealing than the US Dollar, the US Dollar benefitted from safe haven demand and US-China trade hopes to push GBP/USD lower today.

GBP/USD Exchange Rate Forecast: Major US Data Could Further Bolster USD Support

With no breakthrough on Brexit expected any time soon, the Pound is unlikely to have much reason to advance, and so the Pound to US Dollar exchange rate may struggle to return to the highs seen earlier in the week.

Instead, GBP/USD investors will trend with a downside bias on Brexit uncertainties and will shift in reaction to upcoming US news and data.

The best chance GBP/USD has of advancing again before the end of the week is if upcoming US data and US-China trade negotiations lead to a US Dollar selloff.

Major US data due for publication in the coming days includes trade balance stats and wholesale inventories tomorrow, followed on Friday by US inflation rate figures.

The inflation rate could be particularly influential. If US inflation slows, investors may become more concerned that the Federal Reserve could be pressured to ease US monetary policy at some point.

Of course, US-China trade negotiations are likely to be influential too. If trade tensions between the nations worsen, the Pound to US Dollar (GBP/USD) exchange rate’s movement could be more mixed.

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