GBP to USD Exchange Rate Slips from Highs as Investors Digest US-EU Trade Talks and Dollar Steadies

July 26, 2018 – Written by Frank Davies

While Wednesday night’s developments in US-EU trade talks led to fresh weakness in the US Dollar, the British Pound to US Dollar (GBP/USD) exchange rate’s strength is still limited and on Thursday had shed some of its gains. US Dollar movement is likely to remain limited until Friday’s key US growth report is published.

Despite the recent weakness in USD trade, GBP/USD still trends relatively closely to the week’s opening levels. GBP/USD opened this week at the level of 1.3135 and after touching a low of 1.3075 has been generally trending higher. GBP/USD touched a weekly high of 1.3212 on Thursday morning before trending closer to the level of 1.3175 at the time of writing.

GBP Struggles to Capitalise on Rival Weakness as Brexit and Economic Uncertainties Persis

The US Dollar did weaken slightly on Wednesday night, but the Pound was unable to sustain much of a gain despite this week’s slight improvement in Brexit optimism.

On Tuesday, UK Prime Minister Theresa May indicated that the Prime Minister’s Cabinet Office would be taking charge of UK-EU Brexit negotiations going forward.

By extension, this indicated that the dedicated Department for Exiting the EU had had its role downgraded somewhat.

It was seen by markets as a move intended to streamline the UK government’s Brexit plan and minimise in-fighting. Sterling became slightly more appealing as investors perceived the influence of ‘hard Brexit’ advocates as being dampened by the move.

However, while hopes of a softer Brexit have risen slightly, the Pound’s appeal remains limited as uncertainties remain on whether the UK can agree to a Brexit deal with the EU or ultimately pass said Brexit deal through UK Parliament.

Brexit uncertainties continue to weigh on UK economic activity too.

Wednesday saw the publication of the Confederation of British Industry’s (CBI) distributive trades data from July, which did beat forecasts but also indicated that retailers weren’t expecting next month to impress. According to CBI’s Principal Economist, Alpesh Paleja:

‘While the heatwave has boosted retail sales in recent months, we may be seeing some early signs of a cooling off, with orders falling in the year to July and retailers expecting no growth in sales next month.

Indeed, the long-term challenges facing the retail sector are significant. Continually subdued real wage growth means that households are still feeling the pinch, and retailers are still grappling with deeper structural issues, such as digital disruption.’

Uncertainty on whether or not the Bank of England (BoE) will hike UK interest rates next week is also weighing on the Pound.

USD Selloff Calms as US-EU Trade Jitters Lighten

On Wednesday evening, an anticipated meeting between US President Donald Trump and European Commission President Jean-Claude Juncker ended surprisingly amicably.

Both parties agreed to work together to avoid trade tariffs and alleviate jitters between the nations.

Initially, this led to a US Dollar selloff. The Euro (EUR) benefitted strongly from the news and the dousing of trade war fears also weighed on market demand for the safe haven US Dollar.

It was the latest factor to weigh on the US Dollar this week, following concerns about US President Trump’s comments on the currency’s strength, and economists noting that the US Dollar was overvalued.

However, during Thursday’s European session the US Dollar recovered from its weekly lows versus a limp Pound, as investors continued to digest the latest trade news.

The US economic outlook is strong and lighter trade jitters bolster the economic outlook further, so investors have not yet seen a reason to begin a more bearish US Dollar movement.

GBP/USD Forecast: US Growth Rate in Focus

Due to a lack of major changes to the UK or US economic outlooks so far this week, GBP/USD remains relatively range bound and trends closely to the week’s opening levels.

However, that could change if Friday’s anticipated US data is highly surprising.

Friday’s American session will see the publication of US Gross Domestic Product (GDP) growth projection data for Q2. The figure is forecast to have risen from 2% to 4.1%.

If US growth improves even more than expected, Federal Reserve interest rate hike bets will strengthen and the US Dollar may be more likely to recover its recent losses against Sterling.

However, poor US growth data would make a GBP/USD recovery more likely as Fed rate hike bets could slip.

Friday will also see the publication of Q2 Public Consumption Expenditure (PCE) prices projections from Q2. As the Fed is often influenced by PCE data, this could also drive late-week Pound to US Dollar exchange rate movement if it surprises investors.

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TAGS: Pound Dollar Forecasts