GBP/USD Forecast: Could the Pound to US Dollar Exchange Rate Reach 17-Month Highs?

Pound Sterling Surges Vs. US Dollar on Brexit Hopes

The Pound to US Dollar (GBP/USD) exchange rate appreciated by around 200 pips to hit a two-month high last week due to hopes that Britain will avoid a disorderly Brexit.

GBP/USD reached a series of two-month highs last week following reports on Tuesday suggesting that Britain was prepared to offer the EU around £50 billion as part of its divorce settlement.

The increased payment was seen as a positive step towards negotiations moving from divorce to future trade, which would pave the way for the UK government to secure a two-year transitional deal that would prevent a chaotic Brexit in March 2019.

US GDP Positively Revised but US Dollar Exchange Rates Fail to Gain

The US Dollar was unlucky not to gain on an upbeat third quarter GDP report, which saw annualised growth upgraded from 3.0% to 3.3%.

The fact that the US economy registered an expansion equating to 0.8% quarterly growth – twice that of the UK in the same period – despite the damages of Hurricanes Harvey and Irma bodes well for the world’s largest economy.

However, demand for GBP/USD was not impacted by the positive print due to the huge significance of the ongoing Brexit talks.

Could GBP/USD Exchange Rate Reach 17-Month Highs?

If the British government manages to reach an agreement with the EU over the terms of its divorce, then we could see Sterling push ahead further against the US Dollar over the coming days and weeks.

A positive outcome and signs that a transitional deal is in the works could even push GBP/USD towards 17-month highs, levels not seen since the week of the Brexit referendum. However, if the deal breaks down the Pound is liable to plummet swiftly.

This week’s US data is expected to show a sturdy non-farm payroll expansion of around 200,000, but the figure is unlikely to boost Federal Reserve rate hike bets.

A December rate rise is largely priced into the ‘Greenback’, meaning that the US Dollar could actually soften following the decision if the Fed fails to ignite expectations of further tightening in the New Year.

Russian Trump Scandal Weighs on GBP/USD Exchange Rate

Another interesting factor affecting US Dollar exchange rates is US tax reform. President Trump received a fillip over the weekend as the Senate finally passed his -15% tax cut, which will likely boost growth and foster inflation.

However, the ‘Greenback’ has not rallied on the announcement due to concerns that the President could be implicated in a scandal involving his former security advisor Michael Flynn.

If it emerges that Trump lied to the FBI in a case relating to Russian collusion it could create political instability, and the fear of this is currently weighing on the US Dollar.

Data Affecting This Week’s US Dollar Exchange Rate Forecast

5th December GBP Markit/CIPS UK Services PMI (NOV)

5th December USD ISM Non-Manufacturing/Services Composite (NOV)

8th December GBP Manufacturing Production (YoY) (OCT)

8th December GBP BoE/TNS Inflation Next 12 Mths (NOV)

8th December USD Change in Non-farm Payrolls (NOV)

8th December SD Average Hourly Earnings (YoY) (NOV)

8th December USD Unemployment Rate (NOV)

Josh Ferry Woodard

After leaving university in 2011 Josh briefly worked as a currency analyst in the South West of Cornwall. Josh continued monitoring the currency markets and publishing exchange rate analysis after moving to London in 2012, with a particular focus on the impact of economic and political stimuli on forex. Josh was a regular contributor to The Telegraph’s weekly currency feature for several years.

Contact Josh Ferry Woodard