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GBP to USD Exchange Rate Tumbles on Fears UK Government Could Pull Out of Brexit Talks

October 7, 2020 - Written by James Fuller

It’s already been a volatile week for the British Pound to US Dollar (GBP/USD) exchange rate, as political developments and expectations change from one minute to the next. Today, investors are once again selling the Pound on Brexit fears, after days of hopes that the chances of a Brexit deal were rising. The US Dollar has also been on standby, avoiding losses as US political uncertainties are keeping the US Dollar buoyed as a safe haven currency.

Last week saw GBP/USD climb from the level of 1.2743 and gain over two cents before closing the week higher at the level of 1.2934. This was due to Brexit hopes and higher market sentiment for much of the week.

This week’s movement has been narrower overall, amid uncertainty in both currencies. Still, GBP/USD did touch higher in the first half of the week, touching on a half-month best of 1.2994 before trending lower again today.

At the time of writing on Wednesday, GBP/USD trended over half a cent lower in the region of 1.2878.

GBP Exchange Rate Appeal Dented by Britain’s Brexit and Coronavirus Woes

In the first half of the week, the Pound saw a rise in demand as investors reacted to the latest Brexit developments and speculation.

At the weekend, UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen confirmed that Brexit negotiations would be extended a month. It boosted hopes that some kind of Brexit deal could still be secured.

However, despite some reports this week that there had been major progress in talks, there have also been reports that it is possible negotiations will collapse any week now.

Jane Foley, Head of FX Strategy at Rabobank, said:

‘The market is quite nervous about the news coming out of Brexit negotiations,’

According to a Bloomberg report, the UK government could actually pull out of negotiations next week if progress has been unsatisfactory. The report said:

‘Boris Johnson has said he wants the outlines of a deal to be clear by Oct. 15. EU officials, however, have said they won’t be pressured into making concessions and are prepared to call the prime minister’s bluff if he doesn’t compromise, effectively daring Johnson to walk away.

A person familiar with the British position said Johnson’s team would indeed pull the plug on talks if no clear landing zone for a deal has been identified by that date. The analysis adds to pressure on the talks which are resuming in London.’

USD Exchange Rates Resilient as US Political Uncertainty Supports Safe Haven Currencies

The US Dollar has seen mixed movement this week. The US Dollar is a safe haven currency, which is often appealing in times of broad market uncertainty. This has kept it relatively buoyant in recent sessions, amid US political uncertainty.

Safe haven demand has been highly volatile. Investors were more willing to take risks and sell the US Dollar when US President Donald Trump was discharged from hospital at the beginning of the week. However since then Trump’s actions have concerned markets again.

US President Trump told US Congress to leave fiscal policy negotiations until 2021. This worsened concerns about the US economic outlook which also boosted safe haven demand slightly.

Concerns about this and US political uncertainty overall are supporting the US Dollar today. According to Mohamen El-Erian, Chief Economist Adviser at Allianz:

‘for every day that lawmakers delay, there will be even less hiring, more layoffs and greater risk of corporate bankruptcies, especially among the growing number of companies whose financial resilience is eroding as they face tighter lending conditions and their cash burns continue. Accordingly, the longer the delay, the greater the problems that any future package will have to address and the harder it will be to design and implement.’

GBP/USD Exchange Rate Forecast: US Vice-Presidential Debate Ahead

US political developments are likely to remain the primary focus for the Pound to US Dollar exchange rate’s movement in the coming sessions. This could even overshadow this evening’s Federal Reserve meeting minutes.

Tonight, Vice President Mike Pence and Democrat Vice Presidential Nominee Kamala Harris will go head to head in a televised debate.

While Vice-Presidential debates are typically seen as unsurprising and low-influence compared to the actions of Presidential candidates, this election race has been full of surprises already.

Any shocks have the potential to influence global market sentiment and the safe haven US Dollar. For example, a rise in election uncertainty would boost safe haven demand.

Reaction to the debate, as well as any surprise developments from US President Donald Trump, are likely to drive the Pound to US Dollar exchange rate tomorrow.

Pound movement will remain focused on the Brexit process. If there are more signs the UK government could pull out of talks, the Pound could see further losses.

In terms of data, tomorrow’s US jobless claims and Friday’s UK growth data could also influence the Pound to US Dollar exchange rate.
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