Pound Sterling to US Dollar (GBP/USD) Exchange Rate Fails to Recover Weekly Losses as Sterling Remains Weak

Pound to US Dollar Exchange Rate Rebound Slows Following Thursday Surge

Thursday saw the Pound Sterling to US Dollar (GBP/USD) exchange rate recovering most of the steep losses it had seen earlier in the week, but the pair’s recovery rally was short-lived. On Friday, Sterling (GBP) slipped again as no-deal Brexit fears still weighed heavily.

After opening this week at the interbank level of 1.25, GBP/USD slumped and touched on a low of 1.23 – its worst levels in over a year.

While GBP/USD has recovered most of those losses, and currently trends closer to the interbank level of 1.25 again, the pair is still trending below the week’s opening levels and may be on track to fall this week.

The Pound’s potential for gains is capped, amid fears that Britain’s next Prime Minister could aim for a no-deal Brexit.

The US Dollar (USD), on the other hand, has been unable to capitalise on Sterling weakness as Federal Reserve officials are more dovish on monetary policy than expected.

Pound (GBP) Exchange Rates Rebound on Brexit Hopes, but Gains Limited

After being throttled by rising fears of a possible no-deal Brexit at the beginning of the week, the Pound (GBP) saw a brief surge in demand yesterday that saw it rebound from its worst levels in over a year against some major rivals, including the US Dollar (USD).

Investors bought the Pound back from its cheapest levels in profit-taking, and the British currency was also supported by the day’s stronger than expected UK retail sales stats and political developments.

On Thursday, a UK Parliament vote to make it harder for a no-deal Brexit to be forced through was held and succeeded. As a result, no-deal Brexit fears were tempered slightly.

However, no-deal Brexit fears remain high overall. For example, economists at Berenberg predict that there is around a 40% chance of this worst-case scenario Brexit outcome becoming reality.

According to a Berenberg note, the next likely Prime Minister Boris Johnson could still see pressure to deliver a no-deal Brexit:

‘By surrounding himself with hardliners, Johnson could find himself boxed into a hard Brexit with little room for manoeuvre,’

US Dollar (USD) Exchange Rates Edges Higher after Fed Bets-Inspired Drop

The US Dollar (USD) has been fairly volatile over the past week, as Federal Reserve interest rate cut bets fluctuate and inspire movement in the US currency.

Investors bought the US Dollar back from lows at the beginning of the week as it rebounded from a slump last week.

The currency was also briefly supported by stronger than expected US data, including yesterday’s impressive US retail sales results.

However, yesterday saw Federal Reserve interest rate cut bets rise once again, as investors reacted to surprising comments from New York Federal Reserve President John Williams.

Williams, typically one of the more hawkish members of the Fed, surprised investors with a very dovish tone in a speech last night.

His comments caused bets of an aggressive 50 basis point rate cut at the end of the month to rise, and made it easier for the Pound to US Dollar (GBP/USD) exchange rate to recover more of its losses yesterday.

Pound to US Dollar (GBP/USD) Exchange Rate to Focus on UK Politics and Fed Rate Cut Bets

The Pound (GBP) was able to recover some ground against the US Dollar (USD) due to bets of a more aggressive easing stance from the Federal Reserve, but its potential for gains was limited by no-deal Brexit fears.

As a result, these factors are likely to remain the big focus for Pound to US Dollar (GBP/USD) exchange rate in the coming week.

Britain’s Conservative Party leadership contest is expected to reach a conclusion, and Brexiteer Boris Johnson is expected to win, lining him up to succeed Theresa May as Prime Minister.

Any developments regarding the contest, such as Johnson’s Brexit stances, or overall no-deal Brexit bets, are likely to be an increasingly big focus for Pound investors, especially with next week’s UK economic calendar a little quieter.

There will be plenty of key US data for US Dollar investors to react to though, as these stats could influence Federal Reserve interest rate cut bets.

With the Fed holding its highly anticipated July policy decision at the end of the month, bets on how aggressively dovish the bank will become could be influenced by US data, and will be highly influential for the Pound to US Dollar (GBP/USD) exchange rate.

Josh Jeffery

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