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Barnier?s Rejection of Brexit Backstop Triggers GBP/USD Exchange Rate Losses

Published: 8 Jun at 4 PM Tags: Pound Sterling, Dollar Exchange Rate, Currency Exchange, Canadian Dollar Exchange Rate, Euro Crisis, UK, Exchange Rates, Inflation, Pound Dollar Exchange Rate,

Pound Sterling to US Dollar (GBP/USD) Exchange Rate Drops after Fresh Brexit Upset

The Pound (GBP) has fallen back against the US Dollar (USD) today, struggling in the pairing because of Brexit-related uncertainty.

The current issue is the customs union ‘backstop’, an emergency measure that would be activated if the UK fails to reach an agreement on the Irish border.

The backstop is designed to prevent a hard border between Ireland and Northern Ireland, but exactly when the arrangement ends is not entirely clear.

Despite some last-minute wrangling among Downing Street officials, EU chief negotiator Michel Barnier has rejected the latest version of the backstop, which represents a setback in the Brexit process.

Although the backstop is essentially a safety net and not the primary plan for resolving border issues, the fact that EU officials have objected to it has unsettled GBP traders and weakened the Pound.

The Pound might be able to recover against the US Dollar next week if the pace of UK wage growth accelerates along with the rate of inflation.

Higher wages on Tuesday will imply UK economic strength, while higher inflation on Wednesday will put more pressure on the Bank of England (BoE) to consider raising interest rates.

US Dollar to Pound (USD/GBP) Exchange Rate Rises despite Risk of Turbulence at G7 Summit

The US Dollar to Pound (USD/GBP) exchange rate has made a moderate rise today, aided by demand for safe haven currencies amid global economic uncertainty.

Direct US news has been unsettling for the most part, with President Donald Trump ruffling national and international feathers ahead of the G7 summit in Canada.

Mr Trump has been typically outspoken on the way to the two-day meeting, calling for Russia to be reinstated (to make the G8 again) and attacking Canada and the EU over trade.

There is an underlying concern that because of his protectionist agenda, Mr Trump might end up withdrawing the US from the G7; some analysts have taken to calling this year’s meeting the ‘G6+1’.

As Mr Trump has taken the US out of multiple international agreements since taking office, another withdrawal is by no means impossible.

Looking ahead, next week could see the USD/GBP exchange rate rise sharply when inflation data comes out on Tuesday, ahead of Wednesday’s Federal Reserve meeting.

With the former figures, US inflation rates in May are forecast to have risen, which would strengthen the case for a Fed interest rate hike and could boost the US Dollar.

Getting on to the main event, if Fed policymakers vote for an interest rate hike as economists expect then the US Dollar could rise sharply against the Pound.

Although a Fed rate hike has largely been priced in by now, the decision could still support the USD/GBP exchange rate.

On the other hand, if the Fed unexpectedly leaves interest rates unchanged then US Dollar might slide because of trader disappointment.
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