The US dollar ticked lower on Tuesday, undermined by positive risk flows and softer US inflation expectations.
So, how could Brexit negotiations impact your currency transfers over the coming year?
Brexit negotiations move to phase twoThe main Brexit event in 2018 is likely to be the start of the second phase of negotiations, with talks moving on from the terms of Britain’s exit to what the UK’s future relationship with the EU will look like.
These talks are set to get underway in March and could prompt even more volatility in Sterling in 2018 as most observers expect them to be even more fractious than the first phase of negotiations.
Markets are likely to be particularly focused on talks about trade as investors will be eager to learn how the trading relationship will work given that the EU currently accounts for over half of the UK’s total trade.
For some, the most favourable outcome would be an agreement that sees the UK remain part of the single market, similar to Norway and Switzerland, although it looks unlikely that the Conservative government will opt for such an arrangement.
Nevertheless, the completion of any trade deal would likely prompt the pound to strengthen as it would help to dispel some of the financial uncertainty surrounding Brexit and allow firms to begin making plans for the future.
The most disastrous outcome for Sterling would be the failure of the two sides to reach an agreement, which could see the UK revert back to WHO rules and place hefty tariffs on trade between the UK and EU.
Another focus for observers will be whether the UK government can secure a transitional agreement with the EU, with markets hopeful that a proposed two-year transition period after the end of negotiations in March 2019 will prevent a cliff edge Brexit and provide businesses with more time to prepare for changes.
Possible political repercussionsAnother thing to keep in mind is the possible political repercussions to how Brexit plays out over the next few months.
Prime Minister Theresa May is expected to deliver another major Brexit speech early this year, in which she will likely outline how she plans to tackle Brexit going forward.
However, May is facing a party split over how Brexit should be handled, with die-hard Brexiteers seeking a divorce that cuts all ties with the EU, while others are keen to preserve links.
These disagreements are threatening to cause a major rift in the Tory party and could inspire a rebellion from MPs who are unhappy with how negotiations are being handled.
If the situation escalates it could lead to a Conservative leadership challenge or even another general election – both eventualities with the potential to considerably weaken the pound.
Bank of England monetary policy tethered to Brexit developmentsBrexit is also likely to have an impact on the Bank of England’s (BoE) monetary policy plans over the coming year, with Governor Mark Carney tying the bank’s next interest rate shift to the progress of Brexit negotiations.
Following the BoE’s rate hike back in November, Carney warned that the split from the EU is the main risk to UK financial stability and that uncertainty is hampering economic growth in the UK.
Because of this Carney stated that any potential monetary tightening will be dependent on positive progress in talks, with failure to move forward likely delaying chances of a rate hike and weakening Sterling.
However, if the BoE starts hinting that the next rate hike could be sooner than projected, the pound could rally.
So, what should you do if you’re planning a currency transfer in 2018?
If you need to make currency transfers in 2018, stay up to date with the latest currency news to time your transfers effectively. If you’d like to talk through your options with one of our currency experts, please get in touch.
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