On Monday, the Pound saw stronger demand as investors reassessed recent news and focused on hopes for progress in UK-EU Brexit talks. The US Dollar took back some ground on Tuesday though, due to a strengthening domestic outlook.
USD GBP opened at around 0.7644 on Monday and tumbled to a low of 0.7589 during the European session. On Tuesday morning the pair recovered to around 0.76.
US Dollar (USD) Outlook Strong on Data and Policy Hopes
A number of supportive factors at home have helped to make the US Dollar more appealing in recent weeks, helping USD GBP to hold its ground and limit losses despite recovery attempts from Sterling.
Perhaps the most immediate supportive factor in US Dollar trade is the wide expectation that the Federal Reserve will hike US interest rates for a third time before the end of the year.
Bets for a December rate hike have been over 95% since markets opened this week. The Fed indicated in its November policy decision that the door was open for a December rate hike.
This has made US Dollar trade more resilient and has been boosted further by recently strong US ecostats.
For example, while Friday’s US Non-Farm Payroll report fell short of expectations in some ways, the data was still strong enough to support a December interest rate hike.
Economic outlook aside, ‘Greenback’ traders are also excited for US President Donald Trump’s plans to cut taxes.
If the tax reform plan makes it further through Congress, markets are likely to become excited and buy the US Dollar. However, if the plans hit major obstacles like the GOP healthcare plans did over the summer, the US Dollar could weaken again.
US data is unlikely to have a particularly notable influence on US Dollar trade for most of this week, but Thursday’s US jobless claims stats and Friday’s Michigan consumer sentiment survey for November have the potential to cause some movement.
Pound (GBP) Investors Hope for Brexit Developments
The Pound has been stronger since markets opened on Monday, but its strength has been limited by a lack of supportive domestic news.
Recent UK data has been largely underwhelming and continues to indicate that Britain’s economy is slowing down.
On Tuesday morning, the British Retail Consortium (BRC) published a report on how Britain’s retail sector performed in October. According to Helen Dickinson, BRC’s chief executive;
‘The decline was driven by the worst performance of non-food sales since our record began in January 2011, as consumers appear to have opted for outdoor experiences and excursions during half term, over visits to the shops. The growth in food sales meanwhile, adds some colour to this otherwise anaemic picture, but these figures are very much buoyed by inflation.’
The drop in retail activity was partially caused by inflation, which has surged since the Brexit vote last year, while UK wage growth has been unable to keep up.
Sterling wasn’t too heavily influenced by the data however. Markets are already aware of the issues with Britain’s economic outlook and the Bank of England (BoE) has indicated that it will not adjust monetary policy again for some time following last week’s rate hike.
As a result, traders are becoming more focused on Brexit developments, as these are likely to have the biggest impact on the long-term UK economic and Pound outlook.
Amid a lack of notable UK ecostats due for publication before Friday, investors will focus on Brexit news and other political developments instead.
Any new signals that the second phase of UK-EU Brexit talks could begin before 2018 would likely lead to stronger Pound demand, as it would reassure investors that Britain was more likely to exit the EU with some kind of trade deal.
However, if the Brexit process is perceived as having more obstacles than expected, the Pound outlook will worsen and the currency will tumble.
On Friday, September’s UK trade deficit update will be published, as well as September production data. This data could slightly influence Sterling, but potential Brexit news will definitely take priority.
USD GBP Interbank Rate
At the time of writing this article, the US Dollar to Pound exchange rate trended in the region of 0.7610. The Pound to US Dollar exchange rate traded at around 1.3145.
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