GBP Forecast: Pound Sterling in Danger as Irish Border Fears Scupper Brexit Progress

Pound Sterling Headlines This Week

GBP exchange rates weaken as DUP blocks solution to Irish border issue.

EUR rates unsteady after recent Eurozone data proves lacklustre.

USD exchange rates climb as Senate approves tax reform bill.

Theresa May’s political position weakens as DUP allies stymie chance to progress Brexit negotiations.

GBP/EUR Exchange Rate – Pound Falls from Week’s Highs on Irish Border Fears

The Pound Euro exchange rate has managed to claw gains of half a cent over the past two weeks, despite the political chaos reigning in the UK.

After it emerged the UK government was likely to pay €50 billion to the EU in order to cover the costs of the Brexit divorce bill, GBP rose as markets assumed the stalled negotiations were back on track.

However, the issue of the Irish border has since risen to prominence and is threatening to keep the deadlock in place and prevent Brexit talks from moving onto the topic of trade this month.

Next week sees the Bank of England (BoE) announce its latest monetary policy decisions.

No changes are expected to interest rates or the quantitative easing programme, but if members of the Monetary Policy Committee (MPC) appear more upbeat than markets expect then GBP/EUR could find some support.

GBP/USD Exchange Rate – Sterling Gains Evaporate as DUP Block Irish Border Plans

The Pound US Dollar exchange rate has slumped back to the levels seen a fortnight ago, with all gains recorded since having evaporated on political fears.

Theresa May was in Brussels for Brexit crunch talks on Monday and it seemed as though satisfactory plans for the Irish border were being drawn up.

The UK had tentatively agreed to allow ‘regulatory alignment’ between Northern Ireland and the Republic of Ireland, although confusion remains as to what that means.

Northern Ireland’s Democratic Unionist Party (DUP), who prop up Theresa May’s minority Conservative government in the UK Parliament, have refused to accept the deal, claiming it amounted to remaining in the single market and customs union.

The latest PMI data has proven somewhat disappointing. While the manufacturing and construction indices for November showed above-forecast growth, the services PMI disappointed with a larger-than-expected slowdown in the growth rate.

USD/GBP Exchange Rate – Tax Bill Approval Pushes US Dollar Higher

USD has seen sharp gains over the past few days after the US Senate over the weekend approved the Republican tax reform bill.

President Donald Trump is now one step closer to enacting the biggest reform of the US tax system in three decades, with plans to slash the number of tax bands to three and cut corporation tax from 35% to 20%.

Markets have been waiting for Trump to fulfil his promise of tax reform since he was elected, so news that the President has been given the greenlight helped the US Dollar push higher against the Pound.

Next week sees the Federal Open Market Committee (FOMC) announcing its latest monetary policy decision.

USD has been kept in a tight range recently due to huge expectations of an interest rate hike, but as this is already priced-in to the US Dollar such an outcome may not have a huge effect on the ‘Greenback’.

What markets will be more interested to see is whether the Fed seems likely to continue hiking rates next year; a more uncertain prospect that has clipped USD’s wings recently.

EUR/USD Exchange Rate – Euro Gains Quickly Disappear on US Tax Reform Developments

The Euro has been unable to hold onto gains made late last week versus the US Dollar, after the US Senate approved tax reform measures.

Some mixed domestic data kept the EUR/USD exchange rate on an uncertain footing, with German inflation data disappointing with an uptick in price growth fuelled largely by volatile oil and food prices.

Subsequent Eurozone inflation data also proved uninspiring, with a worse-than-expected acceleration in overall price growth and no change in the rate of core price growth weighing on the common currency.

A smattering of gloomy results from more minor data releases, such as the Eurozone business confidence figures and German retail sales reports, kept EUR from registering particularly strong gains.

The European Central Bank (ECB) announces its next monetary policy decision next Thursday – just a day after the latest Federal Reserve gathering concludes.

Any indication that policymakers are considering fixing a definite end date for the quantitative easing programme in place would help support the Euro higher.

Luke Trevail

Luke studied Journalism at university but quickly moved into the financial sector, initially working in retail banking before joining TorFX in 2007. As a Senior Account Manager Luke assists in overseeing the management of the company’s exposure to currency volatility. He uses his years of foreign exchange experience to produce regular news updates exploring the latest currency movements.

Contact Luke Trevail