Pound Sterling US Dollar (GBP/USD) Exchange Rate Trends Narrowly Despite Forecasts of Softer Brexit

Update 2: Signs of Softening EU Position on Brexit Fail to Rally Pound US Dollar (GBP/USD) Exchange Rate

A report in Business Insider encouraged the Pound Sterling to US Dollar (GBP/USD) exchange rate to gain some ground this morning, with the European Parliament suggested to be taking a softer approach towards Brexit.

Demand for the Pound strengthened sharply in response to the report that plans are being drawn up to offer the UK ‘privileged’ access to the single market after Brexit.

However, this was not enough to encourage the GBP/USD exchange rate to hold onto an uptrend for long, with the veracity of the report still not proven.

With markets still in a generally bearish mood the appeal of the US Dollar is forecast to remain steady in the near term.

Update 1: Davis Brexit Speech Weighs on Pound Sterling US Dollar (GBP/USD) Exchange Rate

As Bank of England (BoE) Governor Mark Carney failed to touch on the subject of monetary policy in comments on Monday the Pound Sterling to US Dollar (GBP/USD) exchange rate came under renewed pressure.

Brexit-based jitters also weighed down Pound (GBP) exchange rates ahead of the latest speech from Brexit Secretary David Davis, with the City still leery over the prospect of a harder form of Brexit.

This is forecast to keep the GBP/USD exchange rate under pressure in the near term, even with US data still rather thin on the ground.

With a dip also forecast for February’s UK CBI industrial trends data the Pound looks vulnerable to fresh losses against the US Dollar (USD) today.

Pound to US Dollar (GBP/USD) Exchange Rate Shrugs Off Higher US Inflation

Although evidence of rising US inflation has continued to mount the Pound to US Dollar (GBP/USD) exchange rate was able to recover some of its lost ground ahead of the weekend.

Even so, as January’s consumer, producer, import and export price indexes all surprised to the upside the odds of an imminent Federal Reserve interest rate hike remain high.

While none of these are the Fed’s preferred measure of inflation the overall picture still points towards price pressures accelerating at the start of 2018, increasing the need for interest rates to rise further.

However, the recovery in investor sentiment and global stock markets prevented the US Dollar (USD) from taking advantage to any great extent.

With housing market data and the University of Michigan sentiment index also strengthening on Friday, though, the downside potential of USD exchange rates was limited.

Weaker-than-Forecast UK Retail Sales Dent Pound (GBP) Demand

A weaker-than-expected raft of UK retail sales data saw the GBP/USD exchange rate lose its upward momentum on Friday.

Even though sales rebounded on the month, reversing some of December’s -1.5% contraction, this was not enough to encourage investors.

Signs still point towards consumers tightening their belts in response to the ongoing wage squeeze, which is unlikely to ease any time soon, as sales excluding auto fuel only strengthened 0.1% on the month.

A lingering sense of uncertainty regarding Brexit has also continued to hamper the Pound (GBP), with markets still hoping for greater clarity over the government’s approach to the issue.

GBP/USD Exchange Rate Volatility Forecast on UK Wage Data

Another rallying point could be in store for the GBP/USD exchange rate this week, however, if Wednesday’s UK average weekly earnings are positive.

While forecasts point to a steady reading of 2.4% in the three months to December any signs of improvement may encourage investors to pile into Sterling once again.

Weak wage growth remains a major concern to the Bank of England (BoE), weighing heavily on the domestic economy as a whole, and a stronger showing here could give policymakers cause for confidence.

Even so, the odds of the BoE raising interest rates again in the coming months are unlikely to improve dramatically unless wage growth shows significant progress towards closing the gap with inflation.

Comments from BoE policymakers could still help to drive the GBP/USD exchange rate higher this week, however, if there is any sign of increased optimism about UK outlook.

Rising Odds of Fed Rate Hike Could Prompt US Dollar (USD) Rally

While fresh US economic data will be a little thinner on the ground this week the GBP/USD exchange rate could still come under renewed pressure.

Market attention is likely to focus on the contents of the latest Federal Open Market Committee (FOMC) meeting minutes, as well as any comments from policymakers.

Any indications that the central bank is gearing up to tighten monetary policy again at its March meeting could boost demand for the US Dollar.

However, as investors have already largely priced in the odds of a March rate hike the negative impact on the GBP/USD exchange rate would likely be limited.

Meanwhile, if the mood on stock markets continues to improve the US Dollar may struggle to gain traction in the near term.

Hannah Wilson

Contact Hannah Wilson