Brexit tensions have made the British Pound the worst performing currency this week. The GBP foreign exchange rate suffered its biggest loss last week.
The Sterling saw a huge slide last week, as the days of the UK leaving the European Union draws near and Brexit developments continue to affect the Eurozone and the UK. PM Boris Johnson’s draft legislation is a violation of international law questioned by the European Union.
Monetary policy meetings for both the Bank of England and the Fed will play an important role this week for the forex market.
Internal Market Bill will be a major issue that will be discussed in the UK parliament.
Brexit Concerns Tumble the GBP Foreign Exchange Rate
The GBP/USD has dropped from 1.3285 to 1.2763 last week, a drop of 500 pips. But, with pressure growing on the British Pound, the GBP is expected to see a drop below its very supportive level at 1.2740, its 200 DMA.
Fear that the United Kingdom will exit without a deal is causing anxiety among investors. The pound has dropped from 1.3283 to 1.2763 on Friday. The sell-off has brought the worst decline in the Sterling, similar to the mid-March slide seen during the pandemic.
The GBP foreign exchange rate may weaken to $1.18 if the UK exits with a no-deal, feel experts.
With discord growing between the European Union and Britain, investors have pounded the Sterling. It lost 3.7% last week, the lowest since July, dragging it to below the 1.28 levels.
In January, Britain left the European Union. It is now in a transition period, to bring in a new trade deal, upon which both countries continue to disagree.
UK’s Unemployment Rate on Tuesday is expected to drop to 4.1%, while previously it was at 3.9%.
Bank of England is expected to keep its interest rates unchanged when it meets on Thursday. Governor of the Bank of England has said that negative rates are in the toolkit, but are not for immediate use.
The coronavirus is seeing a sharp increase in the UK of late.
The government wage support program will be ending next month, and jobs are at risk with the end of the furlough scheme. The scheme had kept the UK’s Unemployment Rate remains at 3.9% in June.
The pound against the dollar remains well above its lows. Even though the economic fundamentals in the UK are not good and the GDP contraction is at a record 20.4% for the second quarter, the currency pair is off its year’s lows.
However, a trade agreement has been agreed between the UK and Japan, which is positive for the country.
The Fed Expected to Keep Interest Rates Unchanged
The Federal Reserve monetary policy meeting on 16 Wed will be the key focus of investors this week. Fed Chairman Powell at the Jackson Hole Symposium has announced that interest rates will remain low to reflect their new mandate, and interest rates are expected to remain unchanged by the Fed.
The dollar usually finds support during such times of political uncertainty. It will definitely not weaken even if it does not go up, say analysts.
The US Dollar (USD) has been seeing a downtrend for most of this year. Monetary stimulus has been poured into the economy by the Federal Reserve, helping to keep the US Dollar afloat. After March, the US Dollar has been on a continuous decline against a basket of currencies. Further, investors are worried about the November elections in the US and are hesitating to invest in the greenback.
Industrial Production month-on-month in the US to be released on Tuesday is expected to move lower to 1.2% from the previous data of 3.0%.
European Union Lays Down Ultimatum
PM Boris Johnson has plans to rewrite the Brexit deal, though he faces stiff opposition from Europe, especially from Ireland and Germany. The European Union has warned Britain against breaking the divorce treaty. It has laid down an ultimatum to Britain to either remove the bill or face a judicial trial.
The Internal Markets Bill is defended by PM Johnson. These measures are required to protect free trade between Britain and the rest of the UK, says Johnson.
However, the EU, which calls it a violation of the agreement, has given three weeks to Britain to amend the legislation.
The Euro (EUR) has gained strength, as the GBP foreign exchange rate lowered to 92.3 levels. EU executive claim that trust between London and Brussels is seriously damaged.
Industrial Production month-on-month has taken a hit as it is expected to be at 2.8%, while it was at 9.1%, a month earlier in the Eurozone.
Australian Dollar Continues to Remain in an Uptrend
The Australian dollar has not moved much against the greenback. As the AUD/USD exchange rate is highly correlated to China, the currency pair is gaining strength.
The AUD/USD has strong support at the 0.7250 levels, and investors can make use of every drop in the currency to go long.