Despite Brexit jitters and UK economic uncertainties knocking the Pound much lower last week, the British Pound to US Dollar (GBP/USD) exchange rate has been able to hold its ground following a recovery on Friday. This has been due to market reaction towards comments from US President Donald Trump leaving the US Dollar unappealing.
After opening last week at the level of 1.3234, UK news caused GBP/USD to plunge. On Thursday, GBP/USD briefly touched on a low of 1.2965 – the pair’s lowest level in over 10 months. Still, GBP/USD did put in a solid recovery on Friday and end the week near the level of 1.3135. The pair continued to trend near that level at the time of writing on Monday.
GBP Struggles to Advance amid Lack of Fresh Support
While investors bought the Pound back from its weakest levels towards the end of last week, its gains have been limited.
On Thursday, the Pound to US Dollar exchange rate hit its worst levels all year, and since then key support levels have prompted investors to buy the cheap Pound again.
However, Sterling’s gains were also partially due to weakness in the US Dollar itself. The Pound remained highly unappealing in general and its gains were very much limited as a result.
This has been due to a number of factors ultimately linked to the ongoing Brexit process and uncertainties about how it may negative impact Britain’s political and economic situation.
Last week saw UK Prime Minister Theresa May struggle to push her Brexit plans through UK Parliament amid opposition and divisions in her own Conservative Party.
It worsened market fears that if May’s position remains weak, the UK may fail to pass a potential UK-EU Brexit deal – even if it is agreed in UK-EU negotiations. This caused a resurgence in speculation that a worst-case scenario ‘no deal’ Brexit was still possible.
As well as concerns about Brexit in UK politics, markets became more concerned about how the process could impact the UK economy following highly disappointing inflation and retail sales stats last week.
Bank of England (BoE) interest rate hike bets fell following the lower than expected inflation data, with some analysts now speculating that the BoE now had the reason to further delay Britain’s next interest rate hike if it wanted to.
Overall, despite the US Dollar’s weakness and investors buying the Pound back from its lowest levels, the Pound remains unappealing on Brexit uncertainties. According to strategists from JPMorgan:
‘The political situation will likely remain challenging, with a rather high probability of market adverse scenarios materializing… which in turn could hurt corporate sentiment,’
USD Remains Unappealing Following Trump’s Comments on Its Strength
Despite the Brexit concerns causing broad Pound weakness, the US Dollar has been unappealing since last week too and was unable to benefit from Sterling’s poor performance.
Towards the end of last week, US-China trade war jitters worsened again as US President Donald Trump made surprising comments regarding the Federal Reserve and the US currency itself.
It is highly unusual for a US President to directly comment on or criticise the US Dollar, or the independent Central Bank.
However, Trump took aim at the strength of the US Dollar and the Federal Reserve’s recently rising interest rates.
This worsened market concerns that a currency war could become reality too and caused a US Dollar selloff that has lasted into this week.
Monday’s US data caused no notable change to US Dollar demand. Existing home sales fell well short of expectations, but the Chicago Fed’s national activity index jumped to 0.43 rather than the expected 0.25.
GBP/USD Forecast: Tensions Could Remain with Both Currencies Unappealing
Investors may be unlikely to buy the Pound or US Dollar much in the coming days, unless there are surprising Brexit developments or US-China trade war developments that are surprisingly optimistic.
As UK Parliament is breaking for summer recess on Tuesday, analysts predict Brexit and political jitters may take a backseat in the coming weeks.
However, Britain’s economic calendar is a little quieter too, meaning there is unlikely to be much reason for investors to buy Sterling in general save for the possibility of a major surprise to the upside.
Tuesday will see the publication of the Confederation of British Industry’s (CB) Q3 business optimism figures, and industrial trends orders from July. CBI distributive trades data will come in on Wednesday.
US PMI projections for July from Markit, due on Tuesday, are likely to be more influential and will give investors a better idea of how the US economy has fared this month.
However, as Markit’s US PMIs are not seen to be as influential as ISM’s US PMIs, Pound to US Dollar exchange rate investors may opt to instead await Friday’s key US Gross Domestic Product (GDP) growth data.
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TAGS: Pound Dollar Forecasts