Pound Sterling to US Dollar (GBP/USD) Exchange Rate Rallies as Fears of No-Deal Brexit Ease

Potential Delay to Brexit Date Prompts Pound Sterling US Dollar (GBP/USD) Exchange Rate Gains

Demand for Pound Sterling (GBP) picked up sharply this morning as reports of a potential delay to the March Brexit deadline emerged.

The news that cross-party talks are in progress to push back the exit date in the event of a no-deal Brexit encouraged investors to pile back into GBP exchange rates at the start of the week.

With Theresa May’s unpopular proposed Withdrawal Agreement looking set to be shot down in January’s parliamentary vote the risk of the UK leaving the EU without a deal has risen.

However, if the date is pushed back as proposed this would increase the odds of the Brexit transition progressing smoothly, even in the absence of a deal.

This gave the Pound Sterling to US Dollar (GBP/USD) exchange rate a solid boost, even though a sense of uncertainty continues to hang over the UK outlook.

Government Shutdown Continues to Weigh on US Dollar (USD) Exchange Rates

The mood towards the US Dollar (USD) soured, meanwhile, as the partial government shutdown casts a shadow over the world’s largest economy.

Markets remain wary of the more volatile nature of the Trump administration, with the deadlock over the controversial border wall showing little sign of being broken.

As the Federal Reserve also looks set to take a less hawkish outlook in 2019 this has equally limited the upside potential of USD exchange rates.

Even though the US economy has shown signs of resilience in recent domestic data Fed Chair Jerome Powell remains under pressure to avoid raising interest rates further.

With forecasts pointing towards December’s Dallas Fed manufacturing index easing from 17.6 to 15.0, however, the US Dollar could lose further ground this afternoon.

Pound Sterling (GBP) Exchange Rate Volatility Forecast on UK PMIs

Volatility is likely in store for the GBP/USD exchange rate over the course of the coming week thanks to the release of December’s UK manufacturing and services PMIs.

After a mixed performance in November investors expect to see another month of underwhelming growth, limiting the strength of the fourth quarter gross domestic product (GDP).

If the services PMI falls closer to a state of contraction the GBP/USD exchange rate could slump sharply, given that the sector accounts for more than three quarters of economic activity within the UK.

On the other hand, any acceleration in sector activity could offer the Pound a strong rallying point against its rivals.

December’s UK construction PMI may also provoke some GBP exchange rate jitters on Thursday.

Signs of Tighter US Labour Market Could Boost US Dollar (USD) Demand

USD exchange rates may return to a stronger footing ahead of the weekend, however, if the latest non-farm payrolls report proves positive.

Signs of the labour market tightening further could encourage investors to favour the US Dollar over its rivals, even if the headline unemployment rate fails to improve.

Even so, if December’s average hourly earnings data indicates that wage growth is easing once again this could give the Federal Reserve additional incentive to leave interest rates on hold.

Unless the US economy shows signs of significantly heating up the US Dollar looks set to remain under pressure thanks to the limited prospect of Fed tightening.

Louisa Heath

Contact Louisa Heath