British Pound to US Dollar Exchange Rate May Soar Higher if Federal Reserve Turns Dovish

While the Pound’s late-week gains on Brexit hopes were volatile and likely temporary, the British Pound to US Dollar (GBP/USD) exchange rate still sustained impressive gains last week overall. The US Dollar struggled to avoid losses against Sterling due to expectations for the Federal Reserve to cut US interest rates next week.

After opening last week at the level of 1.2281, GBP/USD saw a jump in demand on Monday and sustained those gains for the remainder of the week.

GBP/USD surged again on Friday. While the pair was unable to hold the day’s monthly high of 1.2462, it was still on track to sustain around a cent’s worth of gains and at the time of writing was trending close to the level of 1.2435.

Sterling ended up seeing one of its best weeks in months due to a combination of economic data, as well as speculation that a softer Brexit deal was becoming more likely.

The British currency’s advance at the beginning of the week was due to signs that Britain’s economy had avoided an imminent recession, but since then its support has been due to Brexit speculation.

No-deal Brexit fears have lightened on hopes that the government will be pressured to follow the new bill to avoid a no-deal outcome, as well as hopes that MPs will explore the possibility of a cross-party agreement on a softer Brexit.

On Friday, there was another surge in demand for the Pound amid speculation that government officials and allies could be softening stances on Brexit as well.

While some officials denied the speculation, it surprised investors and bolstered hopes that a UK-EU deal of some kind was still possible.

The US Dollar, on the other hand, saw more mixed movement throughout last week.

For the most part, it was easy for the stronger Pound to sustain gains against the US Dollar. US Dollar demand was limited by fresh US-China trade hopes, as well as mixed US data keeping Federal Reserve interest rate cut bets high.

The US Dollar is a safe haven currency, so fresh market optimism that US-China trade relations were calming ahead of expected negotiations over the next month left investors buying riskier trade-correlated US Dollar rivals instead.

At the end of the week, the US Dollar was able to avoid deeper losses against the Pound thanks to some stronger than expected US retail sales data. Stats like these softened concerns that the US economy could be headed into recession.

Some analysts speculate that the Pound’s late-week advances may be temporary, so unless developments in UK politics and Brexit continue to support the British currency then the Pound to US Dollar exchange rate could shed those gains soon.

Looking ahead, Pound investors will be awaiting further soft Brexit hopes, and signs that a no-deal Brexit is becoming less likely.

Bank of England (BoE) news could influence the Pound as well. UK inflation and retail sales data will come in on Wednesday and Thursday respectively, ahead of the BoE’s September policy decision.

If the bank takes a more dovish shift about Britain’s economy and monetary policy, the Pound is more likely to weaken.

However, US central bank news is likely to be even more influential to currency movement next week, with the Federal Reserve set to hold its anticipated September policy decision on Wednesday.

The Fed is widely expected to cut US interest rates to 2.0% at next week’s policy decision, but investors are even more interested to see the tone the Fed takes on the US economic outlook.

If the Fed ramps up dovish rhetoric and hints that more easing is on the way, or expresses recession concerns, the US Dollar could tumble and GBP/USD may be in for even further gains.

On the other hand of course, if the Fed continues to maintain its current relatively neutral stance on the US economy, the Pound to US Dollar exchange rate may struggle to continue its recent advance without more optimistic Brexit news.