Pound to US Dollar Exchange Rate Falls on Brexit Concerns despite Risk-Off Movement
Despite broad weakness in the US Dollar (USD) in recent sessions, the Pound to US Dollar (GBP/USD) exchange rate fell from its weekly highs during Wednesday trade. This has been largely due to persistent concerns about the Brexit process.
So far this week, GBP/USD has climbed from the week’s opening levels of 1.3802. While the pair currently trends half a cent higher, near the level of 1.3855, the pair has slipped from Wednesday’s weekly high of 1.3925.
Sterling (GBP) has been able to hold its best levels, even against a weak US Dollar, as traders remain anxious about the possibility of further disagreement and obstacles in the Brexit process.
On Wednesday, the EU expressed concerns with the UK’s goals for post-Brexit trade with the bloc. According to a fresh draft of guidelines for EU negotiators, European Council President Donald Tusk is instructing negotiators to take a strict approach to talks.
According to the draft;
‘Divergence in external tariffs and internal rules as well as absence of common institutions and a shared legal system, necessitates checks and controls to uphold the integrity of the EU Single Market as well as of the UK market. This unfortunately will have negative economic consequences.’
The EU’s apparent rejection of Britain’s negotiation stance on trade left Sterling less appealing on Wednesday.
US Dollar (USD) Exchange Rate Recovery Limited on ‘Trade War’ Fears
Since the US Presidential administration announced intentions to introduce a strict trade tariff on US imports of steel and aluminium, the US Dollar has been unappealing with investors concerned that the US could spark a ‘trade war’.
The US President has doubled down on his intentions and protectionist rhetoric and has even indicated he believes that the US could win a potential trade war.
Concerns of a trade war being on the horizon worsened on Tuesday night as the US President’s top economic adviser resigned from his post in protest of the trade tariff plans.
His departure left markets even more panicked that the US President could replace him with someone more willing to take protectionist stances on trade, causing concerns that the recent protectionist rhetoric will only be ramped up further.
Mixed market risk-sentiment has also weighed on the US Dollar. News that North Korea had agreed to a summit with South Korea in April left markets calmer and this made ‘safe haven’ currencies like the US Dollar less appealing.
Pound to US Dollar Forecast: Could More Gains Be Ahead for GBP/USD?
While Brexit concerns continue to weigh on the Pound and limit its strength against the US Dollar this week, many analysts predict that there could be more gains ahead for GBP/USD.
According to a Reuters poll published on Wednesday, economists expect that due to uncertainty over US fiscal policy and accelerating growth in major nations besides the US the US Dollar will remain pressured in the coming year.
More-so than strength in the Pound, the Pound to US Dollar (GBP/USD) exchange rate could rise in the mid to long-term due to US Dollar weakness. According to Roberto Mialich from UniCredit;
‘GBP/USD has proved to be primarily a ‘USD story’ and we imagine it will continue to do so.
This is because, in our view, the USD, which has rapidly closed its overvaluation gap, will weaken further this year, primarily on the back of the reshuffling of flows outside the US and with the expected increase in the US budget deficit representing an additional drag.’
In the shorter term, investors are likely to remain focused on political developments regarding Brexit and the US stance on global trade for the rest of this week.
However, US Non-Farm Payroll data due on Friday could influence the US Dollar too if it surprises investors.
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