Pound to US Dollar Rebounds on Trade Deal Speculation

GBP USD Picks Itself Up Off the Floor

The pound to us dollar rate began the week in better spirits than it ended the last when Brexit uncertainty was giving it a headache. While trade negotiations between London and Brussels remain finely balanced, media reports over the weekend suggested the EU could be “tempted” to agree a post-Brexit deal in the coming days – with both sides needing to seal an arrangement by Saturday to get it ratified by 31st December. This would be a favourable outcome for the pound, giving it a clear path back to April and May’s highs.

Whether the EU’s chief negotiator, Michel Barnier succumbs to pressure from his bosses in Brussels to strike a deal this week remains to be seen, with serious differences still to be ironed out – predominantly around fisheries and state aid. But with the negotiation clock ticking, the speculation was enough to send the pound to US dollar rate further above the 1.33 handle.

Dollar suffers as global outlook brightens

Meanwhile, the dollar was sagging after recent vaccine breakthroughs continued to boost investor confidence and the global economic outlook with it – leaving the currency set for its worst month since July. Expectations that the Federal Reserve will keep monetary policy loose even as global growth gathers pace have caused investors to take flight from the safe-haven.

Gloomy forecasts meant investors were not hopeful of some much-needed support for the dollar from yesterday’s US manufacturing sector data – and they were proved right. The Chicago Purchasing Manager’s Index (PMI) – seen by many as an indicator of the health of the larger US economy – slipped to 58.2 in November, and while it remains in expansion territory it represents its lowest level since August. Down in Texas, factory activity expanded in November for the sixth consecutive month, but the pace of growth decelerated significantly compared with October

Looking ahead

Investors will continue to keep their eyes glued on what British foreign secretary, Dominic Raab, has described as “the last week or so” of substantive talks. Meanwhile, the pound’s performance could be influenced by today’s Markit Manufacturing PMI. Already in expansion territory, the index is forecast to hold steady – any deviation from this could create movement.

If today’s ISM Manufacturing PMI from the US matches forecasts and ticks lower, the dollar could face further pressure. Investors will also scrutinise Federal Reserve Chair Jerome Powell’s testimony before Congress, during which the central bank official will provide a broad overview of the economy and monetary policy.

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