Why is the pound falling? One word: Brexit
Brexit has become the driving force for the pound in recent weeks. So, with trade talks still stalling ahead of the 31st December deadline, it came as little surprise that the pound to dollar rate was feeling the pressure late last week. This was exacerbated by media reports that the EU’s chief Brexit negotiator, Michel Barnier would cancel his planned trip to London on Friday unless the UK was willing to offer concessions – causing the pair to briefly dip below the 1.32 level.
Mr Barnier made the trip in the end – and he wasn’t alone. The European Commission’s most senior official, Stephanie Riso joined him to add some weight to their cause – with fishing quotas and rights one of the main sticking points in negotiations. The arrival of the duo raised market hopes that the EU can secure a trade deal with Brexit Britain – giving the pound vs US dollar rate reason to rally and settle back at 1.33 as the week ended. An absence of notable economic data from the UK on Thursday and Friday meant these gains were limited, as Brexit tightened its grip on the pound.
Fed meeting minutes and safe-haven status encourage dollar demand
The dollar still managed to have some influence over the pound vs dollar rate as last week, despite US desks downing tools for Thanksgiving. The currency edged higher on Thursday in response to its safe-haven status, after a reduction in market optimism prompted a pullback in equities.
This rounded off a profitable couple of days for the dollar, which had already been buoyed by the minutes from the Federal Open Market Committee’s latest policy meeting – released on Wednesday. Federal Reserve (Fed) officials pointed towards potential adjustments to its bond-buying programme, as the central bank explores alternate ways it can support the US economy. Policymakers at that gathering also voted to keep benchmark short-term borrowing rates anchored near zero.
A quiet week in the UK economic data calendar means Brexit will remain the focus for GBP investors. Tomorrow’s Markit Manufacturing Purchasing Manager’s Index (PMI) is the most notable release. If this indicator of economic performance in UK manufacturing points towards a slump in the sector, the odds of a double-dip recession will grow – following last week’s disappointing UK car production data.
Forecasts point towards a decline in both the Chicago PMI and Dallas Fed Manufacturing Index today, potentially exposing the dollar to renewed selling pressure. If the US manufacturing sector displays fresh signs of weakening this month, fourth-quarter economic growth may be questioned – giving the pound to US dollar rate a boost.
Other notable economic releases from the US this week that might impact the dollar include: ISM Manufacturing PMI tomorrow, ADP Employment Change on Wednesday, ISM Services Employment Index on Thursday, and Nonfarm Payrolls on Friday.
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