Pound exchange rates lifted by Merkel’s Brexit optimism

Philip McHugh September 26th 2018 - 2 minute read

This week’s rally in the pound continued to build steam yesterday, with Sterling sentiment being bolstered once again by cautious optimism that the UK can still reach a Brexit agreement with the EU.

Trade in Sterling appears quiet this morning however, with GBP/EUR flat at €1.1196, GBP/USD muted at $1.3178 and GBP/CAD subdued at C$1.7069, while both GBP/AUD and GBP/NZD edge down to AU$1.8142 and NZ$1.9769 respectively.

Looking ahead, the Federal Reserve’s upcoming rate decision this evening is likely to dominate market sentiment today as investors brace for the bank’s third rate of the year.

What’s been happening?                                    

The pound edged higher again on Tuesday, extending this week’s gains against many of its peers following optimism from German Chancellor Angela Merkel that a Brexit agreement could be reached in October.

Speaking on Tuesday Merkel, appeared to show more confidence than some of her peers about the chances of the UK avoiding a no-deal Brexit, much to the relief of GBP investors.

Tempering these gains, however, was Merkel’s accompanying warning that more ‘hard work’ by the UK government would be needed to provide clarity on what Britain actually wants out of Brexit.

One holdout against Sterling’s advance was the euro, with the GBP/EUR exchange rate showing limited gains as the single currency remained buoyed by Mario Draghi’s recent inflation comments. Economists have begun to shift their expectations that the European Central Bank (ECB) could hike rates earlier-than-expected next year.

The GBP/USD exchange rate meanwhile was able to trend higher on Tuesday as the US dollar remained in a holding position ahead of the Federal Reserve’s latest policy meeting. 

What’s coming up?

The spotlight will undoubtedly be on the US dollar today, with the Federal Reserve set to deliver its third rate hike of the year this evening.

With the hike having already been priced in by markets some months ago, the move itself is not expected to have much of an impact on USD exchange rates.

Instead markets will be focused on the bank’s forward guidance, with the US dollar expected to surge should the Fed hint that its current pace of monetary tightening could continue into 2019.

At the same time the pound looks poised to weaken today as the Confederation of British Industry’s (CBI) latest survey of retailers is expected to reveal activity in the UK’s retail sector slowed this month.

Meanwhile with no notable Eurozone data releases scheduled for today, the euro may struggle to register any gains, with the single currency facing potential downside risks should the US dollar accelerate ahead of today’s Fed meeting.

Written by
Philip McHugh

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