Following a sharp surge in reaction to UK General Election news last night, investors sold the British Pound to US Dollar (GBP/USD) back from its best levels today as markets looked ahead to what was next for the Brexit process and Britain’s economy. Meanwhile, the US Dollar was easily able to push the pair back down from its highs, but the latest US-China trade speculation led to mixed demand for the US currency.
Since opening this week at the level of 1.3136, GBP/USD has trended with an upside bias due to UK General Election hopes boosting Sterling and concerns about the US economic outlook weighing on the US Dollar.
However, after UK election results began to come in the Pound experienced an impressive surge in demand and GBP/USD briefly touched on a high of 1.3509. This was the best level for GBP/USD in over a year and a half, since May 2018.
Since then, GBP/USD has slipped slightly and trends closer to the level of 1.3386 at the time of writing.
GBP Exchange Rates Slide from Best after Impressive Overnight Surge
While the UK public voted in the 2019 General Election yesterday, the Pound’s movement was mixed amid speculation that the election could be tighter than expected.
However, when polls closed last night, the first exit polls indicated that the ruling Conservative Party was actually on course for a large majority.
The Pound rocketed in reaction to the exit polls, amid bets that a strong Tory majority would make it easy for the party to push through its relatively soft Brexit plan.
As results came in through the night, it confirmed a large Conservative majority, dousing much of the domestic political uncertainty that has resulted from years of a small majority or hung Parliament.
Markets begun to bet that the government’s pro-business stances will be good for the UK economic outlook, which boosted the Pound as well.
While the Pound has tumbled back from its best levels today, this is largely the currency steadying from strong gains. Markets are also speculating potential upcoming Brexit uncertainty.
Analysts have argued that the focus will shift to the next phase of Brexit negotiations, which could dominate the Pound outlook next year. According to Antoine Bouvet and James Smith, Analysts at ING:
‘This we feel, was already the widespread assumption in the market before the election. Consequently, we see little room for the feel-good factor to last longer than a few days. As we have highlighted previously, the focus in the first half of next year will quickly turn to the challenge of negotiating a trade deal in a very short amount of time.’
USD Exchange Rates Mixed amid US-China Trade Hopes and US Economic Jitters
The US Dollar gained against a sliding Pound today, but the currency’s performance was mixed overall due to market reaction to global trade factors.
In recent weeks, the US Dollar’s movement has been tied closely to US-China trade relations.
Concerns that negotiations could fail have weakened the US Dollar since last week, but fresh signs that a deal is on the cusp of being reached have also kept the US Dollar unappealing.
The US Dollar is a safe haven currency and has benefitted from cautious hopes for a US-China trade deal, but has also been weakened when US-China hopes strengthen as investors head for more trade-correlated currencies instead.
With trade-correlated currencies gaining from media reports suggesting the US and China are about to agree a ‘phase one’ trade deal, the US Dollar’s movement was limited.
The US Dollar’s strength is also mixed amid the mixed US economic outlook. While hopes of a US-China trade deal are boosting the outlook, recent US data and a more dovish than expected tone from the Federal Reserve are limiting the Dollar’s potential for gains.
GBP/USD Exchange Rate Forecast: Brexit and Data Return to Pound Outlook
With a tumultuous UK General Election finally over, Pound investors are optimistic about the stability in Britain’s domestic political outlook.
However, another year of fresh Brexit uncertainty now lies ahead.
Once Britain leaves the EU in January, as the Conservative government intends, the Brexit process will enter another phase of negotiations during the transition period.
Analysts doubt that negotiations will be finished by the end of the transition period, currently set for the end of 2020. As a result, speculation will quickly rise on how likely the government is to extend the period.
With Brexit likely to return to dominating the longer term Pound outlook, upcoming UK and US data could drive GBP/USD in the coming week.
Slews of UK data, including PMI projections, job stats, retail sales, inflation, and growth will all be published next week. Investors will also carefully watch the Bank of England’s (BoE) tone for reaction to the UK election result.
While the Pound may drive the Pound to US Dollar exchange rate next week, the US Dollar may also be influenced by US-China trade developments and US growth data.
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TAGS: Pound Dollar Forecasts