As forex traders flee from the British pound, the US dollar should experience gains from the uncertainty of Brexit despite its own troubles. However, the possibility of a stronger dollar due to Britain’s current issues is simplistic according to analysts because there are other factors to consider. Reports note, however, that the dollar is likely to remain relatively strong through the beginning of the new year.
The Brexit problem: A looming crisis?
UK Prime Minister Theresa May has been negotiating with the European Council for months, but a deal has not yet occurred, which leaves May in a conundrum. The uncertainty over Brexit is likely going to give the US dollar a boost as traders holding British pounds move their investments to the dollar. The lack of an agreement over Brexit has affected and is still affecting the UK’s growth, according to reports. This growth slowed by 1.3% in 2018, and Chancellor of the Exchequer Philip Hammond expects that it will slow further by 1.9% in the coming year and 1.6% in the year after. A Brexit resolution, experts say, will make it possible for the British economy to improve by 2%.
The potential of a Brexit deal should help the country’s exports, but the prices of imports will increase. The pound will see some improvement once a deal is in place, but as news of the UK wanting to stay in the EU makes its rounds, traders are reportedly more confused than before.
Uncertainty
Forex trading experts have been dealing with volatility for the past few weeks, and a great deal of uncertainty is occurring in different parts of the world. The EUR, for example, is also taking a hit based on reports from this Monday due to the effects of new regulations put into place in August. The deficits of EU members are also reportedly high and have contributed to a weak EUR.
The US, on the other hand, is taking a hit from its trade war with China and showing a bit of a slowdown when it comes to growth, according to experts. Because of this, the AUD should do a lot better in the coming days, as it is a fair-weather currency and can be a haven.
Important factors to consider
Other factors may offset the US’ gains from Brexit, according to a CNN report. As the UK is one of the US’ largest trading partners, the latter may experience setbacks that will cause Wall Street to tumble. When British stocks reached 30-year lows in 2016, Wall Street also dropped by over 500 points. The fact that a number of American companies invest in the UK can also affect the standing of the dollar, as noted by analysts.
The fear of a recession in the UK still looms, and those who are betting on the British pound have been having a tough time in the past few months. As of 18th December, the possibility of a hard Brexit loomed on the pound. GBP/USD is reportedly drifting higher, however, thanks to a relatively weaker dollar.
Brexit anxiety is set to slow down during the holidays, but May will be experiencing a busy first month of the year. Her Brexit proposal will come to heel, as a parliamentary vote will finally have to happen. May’s camp postponed the vote last week after realizing that it did not have enough votes to pass. Reports say that May and her team are looking to use up as much time possible to stop “nay” voters from angling for alternatives should the Commons reject the proposal. May’s actions have prompted Labour leader Jeremy Corbyn to call for a vote of no confidence in the Conservative government. The vote, according to reports, will happen in January.
With markets now thinning out due to the holidays and headlines pointing to a great deal of movement after the New Year, forex traders have their eyes open for January.
GBP/USD Drifting Higher
GBP/USD exchange rates tapped into 1.2670 early Wednesday due to a weaker USD but the market sentiment is different as investors are expecting a global growth slowdown. As the Brexit hangs over the British pound, January will likely wipe out any gains it sees in the interim. Wednesday also brings a good dose of UK data. GBP/USD is still heavily bearish, based on reports and there is plenty of resistance. The positive momentum will see a limit, as the currency pair is barely holding above 20 SMA. Recent data from London point towards the pair sustaining gains but the decision of the Federal Reserve could change the direction.