Brexit Fears Prompt Pound To US Dollar Exchange Rates To Fall Despite American Currency Weakness


Brexit Fears Prompt British Pound to US Dollar Exchange Rate to Fall Despite American Currency Weakness

Currency investors have been more hesitant to buy the US Dollar since last week, but have been even more hesitant to buy the Pound on Brexit uncertainty and this has prevented the British Pound to US Dollar (GBP/USD) exchange rate from making a stronger recovery since last week’s rebound.

The Pound’s potential for gains is highly limited amid fears that the UK government could be shaken up during the final weeks of Brexit.

Last week saw wide volatility and sharp movements in GBP/USD, as after opening the week at the level of 1.3300 the pair spent most of the week tumbling. GBP/USD touched on a weekly low of 1.3024 towards the end of the week, but rebounded on Brexit delay hopes and closed the week nearer the level of 1.3213.

At the time of writing this week, GBP/USD was slipping lower again on Brexit jitters and trended closely to the level of 1.3171.

Pound (GBP) Exchange Rates Slide as UK Political Uncertainty Keeps No-Deal Brexit Fears Alive

Following last week’s broad volatility and sharp movements in the Pound, the British currency has seen steadier movement since markets opened this week.

The currency’s volatility remains high too, as investors await the next big potential developments in UK politics and the Brexit process.

Last week saw the EU confirm a Brexit delay, agreeing that the UK would leave the EU on the 12th of April if the government’s Brexit plan does not pass by the 29th, or that the UK would leave by the end of May if the deal does pass.

Despite the imminence of the end of the Brexit process though, the Pound was dampened at the beginning of this week by signs that UK Prime Minister Theresa May was seeing pressure to step down from her role in return for support in her government’s Brexit deal.

Analysts predict that the government’s Brexit plan will be blocked by Parliament once again this week, but could be followed by indicative votes with the intent of showing what kind of plan could be pushed through Parliament.

According to Kit Juckes, Strategist from Societe Generale, these indicative votes could help pave the way forward but the imminence of a possible no-deal Brexit is still keeping the Pound under pressure:

‘May probably hopes this will convince Brexiteers that her agreement is preferable to a long delay to Brexit but a ‘no deal’ exit remains possible,

Sterling is likely to remain choppy and potentially untradeable.’

US Dollar (USD) Exchange Rate Strength Limited by Recession Jitters

While the Pound was weakened by Brexit fears, a number of factors weighing on the US Dollar limited the US currency’s potential for gains versus Sterling.

Last week’s US data was relatively underwhelming, with Markit’s March PMI projections falling short in every major print and indicating that US economic activity was slowing more than expected.

Perhaps the biggest reason for the US Dollar’s weakness since last week though, was the more dovish tone the Federal Reserve took in its March policy decision, as well as rising concerns that the US economy could slow so much that it may even see recession.

The US Treasury bond yield curve has slumped due to a combination of slowing global growth and the Fed’s more cautious stance, and according to analysts is falling low enough to indicate that a recession may be on the way.

Tapas Strickland, Market Strategist at National Australian Bank, said:

‘We have re-run our preferred yield curve recession models, which now suggest a 30-35% chance of a US recession occurring over the next 10-18 months,’

GBP/USD Exchange Rate Forecast: Brexit and US Trade Data in Focus

The Pound failed to benefit from US Dollar weakness due to Brexit uncertainties, and these are likely to continue to dominate Pound to US Dollar exchange rate movement in the coming days.

Pound investors are highly anticipating the next steps for Brexit, with the UK government expected to hold its third meaningful vote on Brexit in the coming days but the Prime Minister also being pressured to step down, upcoming developments are likely to be highly influential.

For example, if the Prime Minister does indicate she will step down, fresh leadership uncertainty could lead to a plunge in Sterling. On the other hand, if upcoming ‘indicative votes’ show Parliament edging towards a softer Brexit, the Pound may rise.

US data due earlier in the week is unlikely to be particularly influential for GBP/USD, unless various manufacturing indexes impress.

Pound to US Dollar exchange rate traders are more likely to anticipate Wednesday’s US trade balance, Thursday’s US growth rate and Friday’s Personal Consumption Expenditure (PCE) data as well as Brexit news.

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