Pound Becomes Volatile on “Hard Brexit” Fears

The pound was still vulnerable on Tuesday after plummeting to an 11-month low against the dollar overnight over worries of a “hard Brexit” from the European Union.  Meanwhile, worsening US-China trade tensions provided some backbone to the dollar.

one pound coin close up

The comments that have come from officials about a no-deal Brexit fueled fears that Britain would crash out of the EU next year without being able to secure a trade agreement.

The pound slipped as much as $1.2920 overnight, which is its lowest since early September, before it recovered and made up some losses.  It last stood at $1.2942.

On the other hand, the dollar was still firm on Tuesday.  The US dollar index, which tracks the dollar’s strength against a basket of six other major currencies, was hovering at 95.345.

Overnight, it crept close to 95.652, which was its more-than-a-year high that was hit on July 19, before easing somehow by the end of the session.

A number of analysts see that the trade tensions have been supporting the dollar since the United State economy is better placed to handle protectionism when compared to emerging markets, while tariffs have the ability to probably narrow US trade deficit.

“There is still a lot of uncertainty on the tariffs.  We don’t know exactly how much will be implemented and how bad it can get,” stated Shinichiro Kadota, who is a senior FX and rates strategist at Barclays in Tokyo.  “If US economic growth starts to slow down because of tariffs or because past tax-cut effects are waning, then I think the economic performance could fade, which could also lead to fading dollar strength.”

Further, Minori Uchida said that the dollar got additional support from the earnings report on Wall Street that have been largely upbeat.  Uchida is the chief currency analyst at MUFG Bank.

“The correlation between the US dollar and US equities is becoming really strong,” he stated, adding that the greenback “will continue to strengthen as long as US stock markets remain bullish.”

The euro, on the other hand, was still weak after it slipped to a five-week trough of $1.1530 overnight, while German industrial orders lost more than expected in June.  The industrial orders posted their sharpest monthly decline in well over a year.  The common currency last traded a trifle higher at $1.1558.

Meanwhile, the yen grew a bit stronger against the dollar, reaching 111.32 yen prior to Thursday’s expected bilateral trade talks between the US and Japan in Washington. The talks “are seen as a factor that’s pushing up the yen,” according to Uchida.

Further, the Turkish lira steadied against the dollar after broadcaster CNN Turk, which cited diplomatic sources, reported that a delegation of Turkish officials will go to Washington in a couple of days to hold talks about an ongoing spat between the two NATO allies.

The lira traded at 5.2750 against the dollar on Tuesday. It had slipped about 5.5 percent to a record low of 5.4250 overnight after Trump administration announced on Friday that it was going to review Turkey’s duty-free access to the US markets.

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