Pound US Dollar Exchange Rate Boosted by NI Border Proposals

Pound US Dollar (GBP/USD) Holds Modest Gains

(Update: 17:00 14-10-2021) The Pound US Dollar exchange rate retreated from Thursday’s high towards the end of the European session to hold some just below $1.37, trading at 1.3691 at the time of writing.

The Pound slipped slightly through the session as soaring natural gas prices caused more UK energy suppliers to collapse, fuelling concerns over the affect an energy crisis could have on UK consumers and businesses.

Meanwhile, the US Dollar remained under pressure amid risk-on trade that weighed on demand for the safe-haven ‘Greenback’.

A larger-than-expected fall in initial jobless claims supported a more upbeat mood, with 293,000 claims last week, instead of the 319,000 forecast, which is the lowest reading since the pandemic hit the US in March 2020.

The risk-on mood was also supported by US banks reporting forecast beating third quarter results, buoying investors and pushing equity markets higher, in turn limiting support for the US Dollar.

Market mood may sour tomorrow afternoon, however, as US retail sales are expected to have contracted -0.2% in September, down from 0.7% growth in August.

Original article continues below.

Pound US Dollar (GBP/USD) Strengthens on Northern Ireland Protocol Plans and UK GDP

The Pound US Dollar (GBP/USD) exchange rate is building on yesterday’s gains, climbing nearly 0.4% to break above $1.37.

UK GDP growth data and renewed Brexit optimism have boosted Sterling support, while the US Dollar slips on retreating US Treasury yields after September’s inflation data and release of the Federal Open Market Committee (FOMC) meeting minutes.

Pound (GBP) Buoyed by GDP and Brexit Optimism

The Pound (GBP) is buoyant this morning following yesterday’s UK GDP data and new proposals from the EU on the Northern Ireland protocol.

Growth data released yesterday morning showed the UK economy rebounded from a -0.1% contraction in July to 0.4% expansion in August.

According to the Office for National Statistics (ONS), services grew by 0.3%, up from a -0.1% decline in July, and manufacturing increased by 0.5% in August after a -0.6% contraction.

GBP exchange rates are receiving support this morning from the EU’s plan to scrap many of the post-Brexit checks on goods arriving in Northern Ireland from the rest of the UK.

Under the proposal, the EU says spot checks will reduce by about 80% and customs paperwork cut by 50%.

The EU’s ambassador to the UK João Vale de Almeida described the plan as ‘unprecedented’, saying:

“What we have presented in Brussels today is unprecedented. And I have been working for the EU for almost 40 years now.

“What we have done today goes very far. We went the extra mile to address the problems that were created by Brexit in Northern Ireland, which the protocol tries to mitigate.”

Optimism that the UK and EU will come to an agreement on the ongoing contentious issue of the Northern Ireland protocol, has boosted the Pound and pushed GBP/USD higher.

US Dollar (USD) Dips Following Inflation Data and FOMC Minutes

The US Dollar (USD) retreated through yesterday’s session, and is weakening again today in line with US Treasury yields that fell back following September’s inflation data and FOMC minutes.

After the data and minutes publications, market risk appetite also improved, and weighed on safe-haven demand for the ‘Greenback’.

US inflation came in slightly higher-than-expected at 5.4% in September, above last month’s reading and forecast at 5.3%. Core inflation, excluding more volatile goods such as food and energy, met expectation at 4%.

Investors appeared to view the data as unlikely to alter the Federal Reserve’s stance on tapering, with analysts believing that inflation is unlikely to add to the case that evidence is becoming uncontrollable.

Meanwhile, the FOMC minutes from its latest policy meeting reaffirmed expectations that the Fed will begin tapering its bond-buying in mid-November or mid-December.

The minutes showed:

“Participants generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate.”

Fed officials also discussed an ‘illustrative plan’ to reduce asset purchases by $15 billion per month.

In addition, the minutes reiterated that the Fed view that this year’s rise in inflation would prove to ‘transitory’.

Consequently, US Treasury yields dipped and market mood improved, weighing on the US Dollar.

Pound US Dollar Forecast: Will the Pound Extend Gains on Brexit Optimism?

With expectations for rate hikes and tighter monetary policy increasingly becoming priced in, the Pound US Dollar exchange rate looks likely to be driven by UK-EU negotiations on border checks in Northern Ireland, market risk appetite, and the energy crisis that threatens the UK economy.

As long as the UK and EU can move towards making an agreement on the Northern Ireland protocol, the Pound may strengthen.

US data releases through the rest of the week may also drive volatility.

Retail sales are forecast to have fallen in September in the US to a -0.2% contraction, down from 0.7% in August.

However, USD sentiment could receive some support from the Michigan consumer confidence sentiment index looks set to rise slightly in September, although remaining near yearly lows.