Pound to Dollar Forecast: Sunday Deadline Looms for “Firm Decision” on Brexit Talks

The pound slid yesterday morning after negotiators were given until the end of the weekend to decide if a trade pact can be struck – dragging the pound to dollar rate into 1.32 territory. A Brexit deal must be secured by Sunday or the UK will walk away without one, Boris Johnson and Ursula von der Leyen agreed following a “lively and frank” three-hour meal on Wednesday – teeing up a dramatic final round of negotiations. This represents a grave concern for the UK’s future relationships with the EU, given the cavernous gaps that still need bridging on three key issues: fishing waters, rules about subsidising businesses and how a new deal would be enforced.

The UK currency’s heightened volatility saw it recover some of its losses against the dollar overnight and into this morning. A combination of proactive comments from Mr Johnson and general optimism that pragmatism will prevail were probably responsible for the pair’s steady incline on the currency chart. The PM said he was literally prepared to “go the extra mile” and would fly to Paris, Berlin or Brussels if it means he can “get this home and get a deal”.

It was a mixed bag for the pound in terms of economic data yesterday – although the figures had little impact on its performance as the Brexit saga continued to take centre stage. The recovery in Britain’s industrial sector picked up pace in October, with manufacturing output reaching 1.7% in October, compared to 0.3% forecasts and 0.2% in September, while total industrial output recorded 1.3% against 0.3% forecasts. In contrast, UK GDP growth “almost flat-lined” in October, as the economic recovery was stalled by new restrictions.

US Stimulus Concerns Support Dollar

Growing concerns that a US fiscal stimulus package may not be forthcoming caused the dollar to strengthen yesterday morning – a trend that could continue if politicians cannot agree on the size and nature of a new package this year. However, any gains may be curtailed by the distribution of COVID-19 vaccines this month.

The US Consumer Price Index (excluding food and energy) – a measure of prices paid by consumers – increased in November, exceeding forecasts as costs of hotel stays, airfares and clothing rose. However, the negative impact of the pandemic on activity meant inflationary pressures elsewhere remained subdued.

Looking Ahead

Can the UK and EU reach a “firm decision” on a potential deal by Sunday, with negotiations going down to the wire? Time will tell. In the meantime, investors will be keeping an eye on today’s economic releases and the impact – although minimal – they might have on the pound vs dollar rate. From the UK we have the Financial Stability Report and from the US the Michigan Consumer Sentiment Index.

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