– Written by
Ben Hughes
STORY LINK Pound Sterling Forecast: UK-EU Trade Breakthrough Supports GBP/USD
The Pound to US Dollar (GBP/USD) exchange rate edged higher on Tuesday as progress towards a new UK-EU trade agreement offered support to Sterling.
At the time of writing, GBP/USD was trading at approximately $1.3416, up modestly from Tuesday’s opening levels.
The Pound (GBP) strengthened against several major currencies after London and Brussels reached a provisional agreement aimed at reducing post-Brexit trade barriers for food and agricultural products.
The proposed sanitary and phytosanitary (SPS) agreement would remove many of the inspections, certificates and administrative requirements currently facing businesses trading agricultural goods between the UK and European Union.
These checks have increased costs and complicated cross-border trade since Brexit, particularly for food producers and exporters dealing with perishable goods.
Reducing these barriers could therefore provide a meaningful benefit for British businesses, with estimates suggesting the agreement has the potential to boost the UK economy by as much as £5.1bn annually.
The prospect of lower trading costs and improved access to European markets offered encouragement to Sterling investors, particularly as the UK continues to face challenges from elevated borrowing costs and subdued economic growth.
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However, the agreement remains provisional and will require approval from EU member states before it can take effect.
Nevertheless, the progress represents a significant development in Prime Minister Andy Burnham’s efforts to rebuild economic relations with Brussels.
For currency markets, closer cooperation with the EU could improve the UK’s longer-term growth prospects, although the eventual economic benefits will depend on the final terms and implementation of the agreement.
The US Dollar (USD), meanwhile, struggled to establish a clear direction as Americans headed to the polls for the country’s midterm elections.
Opinion polls suggested that Democrats could make substantial gains, raising the possibility of a change in control of one or both chambers of Congress.
The prospect of a shift in the balance of power has created uncertainty over President Donald Trump’s ability to advance his economic and fiscal agenda during the remainder of his term.
A divided Congress could make it more difficult for the administration to secure approval for new tax and spending measures, potentially influencing expectations for US government borrowing and economic growth.
However, investors remained cautious about drawing conclusions before the results became clearer.
With several possible outcomes and their economic implications still uncertain, the Dollar traded without a strong directional bias during Tuesday’s session.
Near-Term GBP/USD Forecast: US Election Results and BoE Decision in Focus
The Pound to US Dollar exchange rate could experience increased volatility on Wednesday as investors assess the emerging results of the US midterm elections.
A strong Democratic performance could prompt markets to reassess expectations for President Trump’s fiscal agenda, particularly if the results point towards greater legislative opposition.
Such an outcome could weigh on the Dollar if investors anticipate reduced scope for additional fiscal stimulus or greater political uncertainty.
However, the market reaction will also depend on how the results influence expectations for government borrowing, Treasury yields and the wider US economy.
For Sterling, attention will increasingly turn towards Thursday’s Bank of England (BoE) interest rate announcement.
Policymakers are widely expected to raise borrowing costs at their November meeting, following recent UK employment and inflation figures that strengthened expectations of further monetary tightening.
With an increase already largely reflected in market pricing, the accompanying vote split and guidance on future policy could prove more important for the Pound than the decision itself.
A hawkish message suggesting that additional rate increases remain likely could provide Sterling with support, potentially allowing GBP/USD to challenge the recent six-week high around $1.3420.
Conversely, a more cautious assessment from the Monetary Policy Committee (MPC), particularly if policymakers push back against expectations for three further rate increases over the coming year, could put pressure on the Pound.
GBP/USD may therefore struggle to establish a sustained move above $1.34 until investors have greater clarity on both the US political outlook and the Bank of England’s next policy steps.
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TAGS: Pound Dollar Forecasts
