A strong US Dollar easily capitalised on a broadly weak Pound last week and the British Pound to US Dollar (GBP/USD) exchange rate tumbled as Brexit jitters weighed on Britain’s economic outlook, while the US Dollar benefitted from market expectations that the US economy would continue to strengthen over the coming year.
Initially after opening at the level of 1.3102 last week, GBP/USD edged higher on Bank of England (BoE) interest rate hike expectations. However, Brexit fears dragged GBP/USD lower to end the week near the level of 1.3001. On Monday this week, GBP/USD tumbled into the region of 1.29 and at the time of writing was trending near an 11-month-low of 1.2920 – its lowest level since August 2017.
GBP Sold as UK Trade Secretary Believes UK is Headed for ‘No Deal’ Brexit
Last week, Brexit jitters heavily overshadowed the Bank of England’s (BoE) August interest rate hike as the bank was sure to note that the uncertainties of the process were clouding Britain’s economic outlook.
BoE Governor Mark Carney stated that if the Brexit process goes worse than the bank expects, or Britain ends up with no post-Brexit deal between the UK and EU, the bank may even need to cut UK interest rates again.
Carney followed up at the end of the week with even more concerning comments, as he noted that the perceived chance of a worse-case scenario ‘no deal’ Brexit had become ‘uncomfortably high’.
Then, over the weekend, UK Trade Secretary Liam Fox worsened market Brexit concerns by stating he believed that the UK was currently headed more towards a ‘no deal’ Brexit than it was to succeed in making a deal with the EU.
The UK government attempted to soften the blow of Fox’s statements on Monday. Downing Street said:
‘We continue to believe that a deal is the most likely outcome because reaching a good deal is not only in the interests of the UK it is in the interests of the EU and its 27 members.
“But the international trade secretary is right to say there is a risk of the negotiations not succeeding and the government has to prepare for all eventualities.’
According to analysts, Monday’s Pound weakness was the biggest currency news of the day and this was the primary cause of Pound to US Dollar exchange rate losses. Boris Schlossberg from BK Asset Management said:
‘The biggest story of the day was the continued slide in cable which hit fresh 11 month highs as it dipped below towards $ 1.2950 support on renewed fears of a hard Brexit.’
USD Continues to Benefit from Solid Data and Trade Jitters
While the US economy is likely to be influenced by a potential US-sparked trade war, so far the economy has shown no signs of being negatively influenced by months of trade jitters and the US economic outlook remains strong.
Friday’s US Non-Farm Payroll report did fall short of expectations in some key prints, but the data was overall solid enough to indicate that the US job market was still strong.
On top of this, expectations that the Federal Reserve will continue to hike US interest rates despite trade uncertainties have left investors confident that the US economy is sturdy enough to weather the worst of potential trade war damage.
According to Paul Eitelman from Russell Investments:
‘The US economy is doing well and the Fed is moving towards a more predictable path of interest rates than earlier which has prompted us to change our underweight positions on US debt to neutral in some portfolios,’
GBP/USD Forecast: Brexit Uncertainties Remain in Focus
Some relatively notable US ecostats will be published in the coming days, but amid a lack of any particularly influential data until Thursday the Pound to US Dollar exchange rate is more likely to be influenced by political developments.
In particular, Pound investors will be hoping for news regarding the Brexit process and the UK government’s stances on negotiations. If ‘no deal’ Brexit fears worsen, the Pound to US Dollar exchange rate is likely to fall further.
On the other hand, if the UK government is able to succeed in calming market jitters the Pound may recover against the US Dollar.
In terms of data, US economic optimism data from IBD/TIPP will be published on Tuesday, as well as JOLTs job openings stats.
Thursday’s US wholesale inventories results from June are likely to be much more influential, but Friday’s slew of UK growth and US inflation figures are likely to be this week’s biggest datasets.
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TAGS: Pound Dollar Forecasts