Rising Odds of No-Deal Brexit Fuel Pound Sterling US Dollar (GBP/USD) Exchange Rate Selloff
The Pound Sterling to US Dollar (GBP/USD) exchange rate slumped sharply this morning as the initial optimism that greeted the UK general election result faded.
Markets were caught off guard as the odds of a no-deal Brexit leapt higher, driven by Boris Johnson’s move to rule out any possible extension of the current deadline.
As investors had bet that a parliamentary majority would lead to a moderation of Johnson’s hard Brexit leanings this saw Pound Sterling (GBP) drop across the board.
With a December 2020 cliff-edge Brexit now looking significantly more likely thanks to the general election result GBP exchange rates could remain biased to the downside heading into the end of the year.
UK Wage Growth Miss Drags on Pound Exchange Rates
Support for Pound Sterling diminished further thanks to the disappointing nature of October’s UK wage growth data.
As growth in average weekly earnings dipped from 3.7% to 3.4% this suggests that household finances could come under greater pressure in the fourth quarter.
Given that higher levels of consumer spending have helped to shore up economic activity in recent years this sign of weakness left the GBP/USD exchange rate on the back foot.
Although the corresponding unemployment rate held steady at 3.8%, still pointing towards a tight labour market, this was not enough to shore up GBP exchange rates at this juncture.
Underwhelming Industrial and Manufacturing Production May Dent US Dollar
However, the mood towards the US Dollar (USD) could sour this afternoon if November’s manufacturing and industrial production figures fail to impress.
Unless the manufacturing sector can demonstrate a rebound in activity USD exchange rates look vulnerable to renewed selling pressure.
Evidence that the world’s largest economy is struggling to shake off the deterioration in global trade conditions could see the US Dollar fall out of favour once again.
Even so, as long as markets remain in a state of risk aversion the safe-haven US Dollar looks set to benefit, regardless of the weakness of any US data.
As long as there are no fresh signs of deterioration in trade relations between the US and China, and the agreed phase one trade deal remains on track, USD exchange rates may struggle to find traction.
Pound Sterling Set for Further Volatility on BoE Policy Meeting
Further volatility looks likely for the GBP/USD exchange rate in the wake of Thursday’s Bank of England (BoE) policy meeting.
While no change in monetary policy is expected at this stage markets are still keen to gauge the current outlook of policymakers.
Any indication that interest rates could see a cut in the coming months may put additional pressure on the Pound as worries over the resilience of the UK economy pick up.
On the other hand, signs that the BoE could keep rates on hold for longer, in spite of the elevated sense of Brexit anxiety, could encourage the GBP/USD exchange rate to recover some of its lost ground.