Pound to Dollar Raises on Brexit Optimism

Pound to Dollar Rate Recovers Losses

The pound maintained its volatile start to the week yesterday. Having briefly dipped below the 1.33 level against the dollar in the morning, it shot above 1.34 under the influence of yet more Brexit soundbites. These bitesize reflections of the current state of play in the negotiation process are coming thick and fast from UK and EU officials – and are the main force behind any movement in the pound at present.

The latest updates from the heart of the action saw Boris Johnson state that the UK wants a post-Brexit trade deal with the EU but not “at any cost”; while Ursula von der Leyen suggested that there had been “movement” on the principles of the so-called level playing field.

The pound was leant further support by rumours that MPs are being geared up to vote for a possible Brexit trade deal next week as hopes of a breakthrough rise. If both negotiating teams manage to strike a last-minute deal, they will face a race against time to formally approve the accord before the transition period expires on 31 December. This could prove trickier for the EU, which must satisfy the bloc’s 27 national governments as well as the European Parliament.

News that the price of food and clothing have fallen in the UK, putting a drag on inflation, had little impact on the pound vs dollar rate, which remained in mid-range of the 1.34 level this morning. Consumer Price Index growth missed expectations in November – during the second lockdown in England – implying a weaker rise in prices than forecast.

US Stimulus Hopes Weigh on Dollar

While the pound wrestles with Brexit headlines, the dollar has been contending with its own bout of uncertainty. Mixed news about the likelihood of further fiscal stimulus ahead of the Federal Reserve’s policy meeting today has seen its safe haven status impact its performance. Hopes that a substantial package will be announced continued to weigh on the dollar yesterday.

Looking Ahead

UK and EU officials are attempting to agree on a trade deal by 31 December – the post-Brexit transition deadline – when the UK could wave goodbye to EU trading rules. If they fail to strike a historic agreement, the UK and EU would be forced to trade together under World Trade Organisation rules. This unwanted scenario would result in both parties imposing taxes – or tariffs – on imported goods, leading to higher prices – a potentially damaging outcome for the pound to dollar rate, which could fall off a cliff as a result. Equally, if both sides manage to beat the clock and get a deal over the line, the pair could soar to multi-month highs.

In the meantime, investors will continue monitoring data calendars in the UK and US for an indication of economic health. A raft of figures and announcements are due today on both sides of the Atlantic: the pick of the bunch are the Markit Services PMI from the UK and the Federal Reserve’s interest rate decision.

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