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GBP to USD Exchange Rate Testing 2 and a Half Year Best Levels as Brexit Deal Relief Buoys Sterling

January 4, 2021 - Written by Ben Hughes

A combination of Brexit relief and some strong UK data helped the British Pound to US Dollar (GBP/USD) exchange rate continue to climb in its best levels in years today. The US Dollar continues to suffer as markets betting on a global recovery from the coronavirus pandemic buy riskier assets. Even uncertainty around Britain’s coronavirus and Brexit situations are not enough to prevent the Pound from trending strongly against a weak US Dollar.

After opening last week at the level of 1.3385, GBP/USD saw a jump in demand as investors showed relief that the UK and EU were quickly passing the finally-agreed Brexit deal. Ultimately, GBP/USD closed the week higher at the level of 1.3672.

Since markets opened this morning, GBP/USD has been edging even higher. At the time of writing, GBP/USD is trending near a high of 1.3700.

These were the best GBP/USD levels since around May 2018 – over two and a half years ago.

GBP Exchange Rates Buoyed as Brexit Deal Implemented and UK Data Stronger

The Pound has seen a surge in demand against weaker currencies in recent weeks.

Investors have been buying the Pound in relief since the UK and EU agreed a post-Brexit trade deal at the last minute. It means there will be less economic damage from the Brexit process than a no-deal Brexit may have led to.

Relief over Brexit continued last week, as the UK and EU passed the deal into law before the end of the Brexit transition period.

Since the New Year, Brexit has finally fully passed, and Britain is now operating its new relationship with the EU.

While financial services will see a slightly extended transition period, many financial services have been preparing a move into the Eurozone for some time already.

The Pound’s appeal continues to be supported by Brexit relief this week so far. On top of this, it is also being supported by today’s stronger than expected UK manufacturing PMI.

The manufacturing PMI actually came in even higher than projected and its best levels in three years. It showed that Britain’s manufacturing sector was weathering the coronavirus pandemic much better than it had been towards the beginning of the pandemic.

According to Rob Dobson, Director at IHS Markit, the outlook isn’t particularly strong though:

‘It seems likely that this boost will reverse in the opening months of 2021, making for a weak start to the year. Note also that the December PMI data were collected prior to the border closures, which will have led to further logistics and production disruptions for many companies.’

USD Exchange Rates Continues to be Dragged by Coronavirus Recovery Optimism

The safe haven US Dollar’s outlook continues to be weighed by the global outlook. As coronavirus vaccines continue to rollout in major economies, markets are becoming more optimistic that the global economy will be able to rebound from the pandemic later in the year.

This optimistic outlook is limiting demand for the safe haven US Dollar. Investors remain more willing to take risks instead.

According to Alvin Tan, FX Strategist at RBC Capital Markets:

‘The US Dollar slipped further through the threshold of the new year as global risk sentiment stayed buoyant’,

The US coronavirus situation is also fairly negative compared to some other major economies.

This, combined with lower US interest rates and higher US deficits have kept the US Dollar less appealing than rebounding rivals like the Pound.

GBP/USD Exchange Rate Forecast: Rise in Safe Haven Demand Could Push US Dollar Higher

The Pound continues to benefit from Brexit relief and the weakness of the safe haven US Dollar.

However, the US Dollar could rebound again if there is a rise in market demand for safe havens soon.

If there is a fresh complication in the coronavirus pandemic, or political uncertainty takes a turn for the worse, the US Dollar may see a jump in safe haven demand.

Political uncertainty is definitely possible as well. An upcoming runoff election in the US State of Georgia will decide which party controls the US Senate in the coming years.

If there is a shift in power, it could lead to a brief surge in uncertainty. According to Jeffrey Halley, Market Analyst at Oanda:

‘A Democrat win is likely to see a sharp correction higher by the US Dollar, exacerbated by the world being universally short the greenback

Investors should probably wait for the election dust to settle before committing heavily to new Dollar short positions.’

There is some notably UK and US data due in the coming sessions as well, which could influence the perceived resilience of the UK and US economies amid the coronavirus pandemic.

Tomorrow’s US manufacturing PMI from ISM, and Wednesday’s UK services PMI and US factory orders stats, could all influence the Pound to US Dollar exchange rate.
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