December 24, 2020 - Written by Toni Johnson
STORY LINK GBP to USD Exchange Rate Near 2020 Best Once More as Brexit Deal Reportedly Imminent
Despite a boost in safe haven demand at the beginning of the week, the British Pound to US Dollar (GBP/USD) exchange rate is once again approaching its best levels in years. As markets await an imminent Brexit deal announcement, the US Dollar’s safe haven appeal has been dampened and the Pound is capitalising on the market’s Brexit optimism.
After opening this week at the level of 1.3522, GBP/USD plummeted. The US Dollar capitalised on safe haven demand and rebounded from recent lows, taking GBP/USD as low as 1.3193, over three cents lower.
However, the US Dollar’s rebound was actually short-lived as Brexit optimism has been building once more in recent sessions. Since yesterday, GBP/USD has recovered all those losses and even advanced beyond the week’s opening levels.
At the time of writing, GBP/USD trends near a high of 1.3615 - which is not too far below last week’s two and half year best of 1.3621.
GBP/USD has seen considerable gains since last week, despite the US Dollar’s rebound attempt.
Pound (GBP) Exchange Rates Surging as Markets Expect Imminent Brexit Deal
Earlier this week, the Pound was throttled by fears over a new more infectious strain of the coronavirus Covid19.
However, within mere days the Pound’s tune has become considerably more positive, as market attention quickly switched back over to Brexit. After years of contested talks, the UK and EU are reportedly on the brink of announcing a Brexit deal.
Expectations that a Brexit deal is imminent are causing the Pound to surge higher today. As the Pound has been something of a proxy for Brexit sentiment since 2016, it is the currency that stands to benefit the most from positive Brexit developments.
Still, while these expectations are a relief for Pound investors today, analysts continue to warn that Britain’s economy is still in for a rough few months.
The expected Brexit deal is still a fairly hard Brexit deal, not the soft agreement that keeps the UK and EU close that markets hoped for. According to Paul Dales from Capital Economics:
‘Compared to the other options that the government could have chosen, this is still a relatively “hard” Brexit as the UK will leave the EU’s Single Market and Customs Union. The latter means that custom checks and procedures will be required on goods moving between the UK and the EU from 1st January for the first time since 1973. This will add to the major disruptions and delays at the UK-EU borders already caused in recent days by the COVID-19 crisis.’
US Dollar (USD) Exchange Rates Tumble as Market Panic is Calming
Earlier in the week, markets were sent into a panic by a new more infectious coronavirus strain, as well as concerns that US fiscal policy could be blocked at the last moment.
As the US Dollar is a safe haven currency, this briefly caused a surge in demand for the US currency. Anxious markets found the safety of the US Dollar more appealing.
However, that safe haven rebound was short-lived. Hopes for global market recovery have been leaving the safe US Dollar less appealing in recent weeks, and Brexit deal hopes seem likely to keep that trend going.
The US Dollar has been less appealing again amid expectations of an imminent Brexit deal.
What’s more, analysts are not all that panicked that the US fiscal policy package had been delayed. This is due to expectations that the fiscal stimulus is more likely to eventually pass, perhaps in a better state, than it is to be completely blocked.
According to Lauri Halikka, Fixed Income and FX Strategist at SEB in Stockholm:
‘Republicans and Democrats agreeing on the deal is positive news, and now the delay gives you an upside option of getting more – the (stimulus) bill is unlikely to get worse,
So the near-term uncertainty is probably compensated by a chance of getting a larger bill. Further, Biden gets inaugurated in less than a month’s time, so the delay is unlikely to get any longer than that in the worst case.’
GBP/USD Exchange Rate Forecast: Brexit Deal Could Mean Best Levels in Years
Amid expectations that a UK-EU Brexit deal is right around the corner, the Pound to US Dollar exchange rate could be in for more gains in the coming sessions.
If a deal is reached as expected, attention will quickly turn to whether or not the deal will be passed into UK and EU law quickly enough.
If it appears that the deal will be smoothly fast-tracked into law, the Pound’s appeal is likely to intensify and the Pound is likely to keep climbing and pushing more highs.
GBP/USD isn’t that far from its best levels in two and a half years. More gains on Brexit optimism could see the pair trending closer to those highs.
The safe haven US Dollar, on the other hand, may not see the strong rebound it attempted earlier in the week.
If Brexit and US political situations continue to improve, markets will become more willing to take risks. This will only weigh on the US Dollar’s appeal.
Amid a lack of notable data due in the coming sessions, the US Dollar is only likely to strengthen if the global coronavirus situation worsens enough to send investors to safer assets.
Overall though, unless the Brexit deal fails to make it to UK or EU law in time, the Pound to US Dollar exchange rate is quite well positioned for more advances.
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TAGS: Pound Dollar Forecasts