Pound to US Dollar (GBP/USD) Exchange Rate Forecast: Federal Reserve and Brexit Developments in Focus during Busy Week

Update: Pound to US Dollar Exchange Rate Surges on Brexit Developments and Further GBP Gains Could Be Ahead

News of major progress in UK-EU Brexit negotiations left the Pound to US Dollar (GBP/USD) exchange rate far more appealing on Monday afternoon.

GBP/USD surged from the week’s opening levels and touched on a high of 1.40, its best level in over a month.

The jump in Pound (GBP) demand came as UK and EU negotiators announced that large parts of a Brexit draft deal had been agreed to, including the terms of a transition period.

With a post-Brexit transition period now closer to becoming reality, fears of a ‘cliff-edge’ hard Brexit scenario have lightened and the Pound outlook has risen.

Pound to US Dollar Exchange Rate Movement Mixed as GBP/USD Investors Await Major News

US political uncertainty and trade concerns helped the Pound to US Dollar (GBP/USD) exchange rate see major gains last week, but the Pound (GBP) still lacks the drive to sustain further gains as US Dollar (USD) demand improves today.

Last week, GBP/USD opened at the level of 1.3850 and closed almost a cent higher at 1.3946. The pair briefly touched a March high of 1.3993 in the middle of the week, although Sterling was not strong enough to hold onto this high.

As markets cooled from last week’s serving of positive US data, Monday saw Pound to US Dollar traders hotly anticipating major news due throughout the week.

Of particular note are focus on the Brexit negotiations and the US monetary policy outlook.

Pound investors hope for UK and EU negotiators to reach a transitionary period deal during the EU summit taking place on Thursday and Friday, while US Dollar investors anticipate action at the Federal Reserve.

US Dollar (USD) Exchange Rates Weighed by Political and Trade Uncertainties

The US Dollar saw broadly weak trade last week, with investors remaining concerned by perceived chaos in the US Presidential administration.

Donald Trump fired US Secretary of State Rex Tillerson and replaced him with CIA Director Mike Pompeo. The fresh uncertainty left investors anxious about the stability of the government.

Towards the end of the week, reports emerged that national security adviser H.R. McMaster could be the next of the President’s cabinet to go, which put additional pressure on USD.

On top of this, Donald Trump has continued with protectionist rhetoric, saying that the US could win a trade war. These concerns have left the US Dollar weaker.

The US Dollar did see slightly stronger demand before markets closed though, thanks to some stronger-than-expected consumer sentiment stats from the University of Michigan.

Pound to US Dollar (GBP/USD) Forecast: Brexit and Federal Reserve Outlooks in Focus

While major data will be published over the coming days, it may have only limited effect on the Pound to US Dollar (GBP/USD) exchange rate as investors anticipate more impactful news in the latter half of the week.

The Federal Reserve will hold its March monetary policy decision meeting on Wednesday with the bank widely expected to hike US interest rates to 1.75% during the meeting.

However, with a rate hike already priced in investors are perhaps more focused on listening out for hints on what the bank’s plans for the rest of the year will be.

Will the Fed hint that only two more interest rate hikes are expected throughout the year, or could three more be possible? As recent US inflation and wage data has been mixed, a more cautious tone from the Fed could weaken the US Dollar outlook.

Sterling investors, on the other hand, will focus on potential Brexit developments from the EU summit towards the end of the week. If the UK government is able to reach a Brexit transition period deal with the EU, the Pound will see stronger demand.

On the other hand, if UK and EU negotiations remain stuck the Pound outlook will worsen and Bank of England (BoE) interest rate hike bets will drop.

The BoE will hold its March policy decision meeting on Thursday. While no rate hike is expected this week, the bank is likely to reassert its outlook hinges on how Brexit negotiations unfold.

UK inflation, wages and retail sales stats due in the coming days may also influence some GBP/USD movement.

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