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GBP to USD Exchange Rate Stumbles to Four Month Worst as Cross-Party Brexit Talks Collapse

May 17, 2019 - Written by Tim Boyer

As Brexit concerns continue to build, the British Pound to US Dollar (GBP/USD) exchange rate has endured a second consecutive week of steep losses and the pair now trends near its worst levels since the beginning of the year. Despite US economic uncertainties, the US Dollar has been able to benefit from Pound weakness thanks to rising market demand for safe havens.

Following a slump from 1.3173 to 1.2998 the week before last, GBP/USD has seen even steeper losses this week so far. GBP/USD briefly jumped when markets opened, but since then has seen solid losses every day of the week, and at the time of writing on Friday was trending closely to four month lows of 1.2756. This was the worst level for GBP/USD since the 11th of January.

Throughout the week, soft Brexit hopes faded and gradually fears that a no-deal Brexit was possible returned. The US Dollar has been climbing despite concerns about the US economic outlook.

GBP Exchange Rates Tumble as Cross-Party Brexit Negotiations Fall Through

For most of the week, investors sold the Pound on fears that a soft Brexit was becoming unlikely.

No progress towards reaching an agreement on how to resolve Brexit has been made, and there is anxiety that a strong performance for the Brexit Party at next week’s EU elections would make it even more likely that a hard-Brexit advocate could be the next PM.

UK Prime Minister Theresa May has indicated that she will begin the process of stepping down in June, even if her Brexit plan fails to pass through Parliament in its fourth attempt.

UK political uncertainties made the Pound unappealing, and Sterling was sold even deeper towards the end of the week as it was confirmed that cross-party Brexit talks between the ruling Conservative Party and opposition Labour Party had collapsed.

Analysts and investors reacted to the news by expressing concerns about the increasingly unclear way of proceeding with Brexit. According to Connor Campbell, Analyst at Spreadex:

‘The fact Theresa May is set to outline her exit date after the withdrawal agreement bill vote at the start of June means that a) cross-party talks are now almost completely dead, and b) the UK could be facing a hard-liner Brexit Prime Minister, especially if the European elections go as expected next week.’

USD Exchange Rates Firm despite Lack of Supportive US Data

Investors have been buying the reliable US Dollar in recent weeks, despite a lack of strong domestic support for the US currency.

As the US-China trade war resumes and tensions rise, investors are becoming more hesitant to buy any trade-correlated currencies.

As a result, while there are concerns that the US economy will also be negatively impacted by US trade tensions, the US Dollar is continuing to benefit from market demand for safe havens.

The US Dollar is a safe haven currency, meaning it is appealing and reliable in times of broad market uncertainty.

This is why the US Dollar has been resilient, despite recent US data keeping analysts wary about the possibility that the Federal Reserve could cut US interest rates sometime over the coming year.

This week’s US data was generally disappointing, with retail sales and industrial production falling short, but market safe haven demand kept the US Dollar resilient.

GBP/USD Exchange Rate Forecast: Developments in Politics and Trade to Drive Movement

The Pound to US Dollar exchange rate is likely to remain driven by developments in politics in the coming week, as the key EU election draws near and US-China trade tensions continue to dominate headlines.

If the EU elections go even worse for the ruling Conservative Party than expected, the Pound is likely to weaken as fears of a hard Brexit would worsen.

However, if concerns of the US economy being impacted by trade uncertainties worsen, GBP/USD may actually recover slightly.

Upcoming major US data, including PMI projections and durable goods orders, could influence the US economic outlook.

The most notable news on the economic calendar for US Dollar investors though, will be the Federal Reserve’s latest meeting minutes report, due on Wednesday.

If the Fed becomes more dovish or US data disappoints, Fed interest rate cut bets could limit the Pound to US Dollar (GBP/USD) exchange rate’s chances of falling further.
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