Brexit Optimism Turbocharges the Pound, US Stimulus Impasse Crushes the US Dollar

GBP/EUR Exchange Rate: Sterling Rallies on Brexit Deal Hopes

After suffering a sharp sell-off on the back of the UK’s GDP figures last week, the Pound to Euro (GBP/EUR) exchange rate has managed to mount a convincing recovery, in response to renewed Brexit hopes.

This comes on the back of optimism from the UK government, with Downing Street suggesting it may be possible to agree a post-Brexit trade deal with the EU next month.

While analysts remain pessimistic at the chances of a deal, given the ‘significant differences’ that both sides have repeatedly spoken about, GBP investors seized on the government’s optimism. Sending the GBP/EUR around half a cent higher.

However this bullish tone towards the Pound could fade in the latter half of this week as the latest round of Brexit negotiations comes to a conclusion.

This may puncture hopes for a Brexit deal if progress in talks remains limited.

GBP/USD Exchange Rate: Pound Nears New 2020 High

The GBP/USD exchange rate has been catapulted to a fresh eight-month high this week, and is currently sitting just short of its highest levels since the start of 2020.

This acceleration in the GBP/USD exchange rate has been aided by the UK’s consumer price index as it reported a surprise jump in inflation last month, which may offer the Bank of England (BoE) with more room to manoeuvre with its monetary policy.

Still to come this week, we have the publication of the UK’s latest PMI figures.

August’s preliminary figures are expected to report that activity in the UK’s private sector continued to expand as lockdown measures were eased further.

However any upside in the Pound could prove limited if the manufacturing and services index highlights firms’ employment concerns.

USD/GBP Exchange Rate: Stimulus Impasse Enacts Heavy Toll on the US Dollar

The USD/GBP exchange rate was been met by a persistent sell-off over the past week as the US Dollar was broadly shunned by markets.

This has been largely attributed to the failure by US lawmakers to reach a deal on the next round of US fiscal stimulus, before Congress was adjourned for a month-long recess at the end of last week.

USD investors are concerned about the financial pressure this could put on many families in the US and how it will likely slow the country’s economic recovery by limiting consumer spending.

This has also stoked expectations that the Federal Reserve will need to maintain its expansionary monetary policy for longer, in order to make up for the shortfalls in fiscal stimulus.

Looking ahead, the publication of the minutes from the Federal Open Market Committee’s (FOMC) most recent meeting look to act as a key catalyst in the US Dollar this week. Will a dovish outlook on employment and growth send USD exchange rates even lower?

EUR/USD Exchange Rate: Euro Gains Capped by Coronavirus Resurgence

The EUR/USD exchange rate struck a fresh two-year high over the past week, but these gains have largely a story of US Dollar weakness rather than Euro strength.

This is due to the appeal of the Euro being tempered by a resurgence of coronavirus cases across Europe over the past couple of weeks.

Infection rates have been steadily climbing across the continent throughout August, and EUR investors are growing increasingly nervous that some regions may need to go back into lockdown, stifling the Eurozone’s economic recovery.

However the Euro may still find support towards the end of this week’s session with the publication of the Eurozone’s latest PMI releases.

August’s preliminary PMIs are forecast to report that business activity in the bloc has continued to rise, likely bolstering the Euro, especially if Friday’s accompanying consumer confidence figures show that household sentiment continued to improve this month in spite of the coronavirus resurgence.

Matthew Andrews

Contact Matthew Andrews