Pound v US dollar: GBP volatility continues as Brexit dominates currency markets

The pound is currently trading around $1.333 against the US dollar, almost flat from this week’s starting levels but notably down from a high of $1.342 earlier this morning.

Sterling movement continues to be driven by Brexit sentiment at the start of this week, with the UK currency fluctuating following clashes between David Davis and the Irish government.

This comes after the Brexit secretary said on Sunday that the recent exit agreement over the Irish border was a “statement of intent” and was not legally binding.

This also followed reports from Downing Street suggesting that cabinet ministers were told that the promises of full regulatory alignment were “meaningless” and that the deal struck last week may be a little more flexible than thought, with Theresa May writing to MP’s saying that “nothing is agreed until everything is agreed”.

The Irish government were quick to rebuff this however as it warned that “both Ireland and the EU will be holding the UK to the phase one agreement”.

Markets fear that any reneging on the deal struck last week could prompt further delays to trade discussions after EU Chief Negotiator Michel Barnier stated that trade talks would only go forth in February if Mrs May provided more Brexit clarity. 

At the same time, the US dollar is strengthening at the start of this week’s session ahead of the Federal Reserve’s policy meeting on Wednesday, with the bank overwhelming expected to vote to raise US interest rates for a third time this year.

However, some economists forecast that Fed policymakers may strike a more dovish tone regarding further rate hikes in 2018 in Wednesday’s meeting, possibly leading to some weakness in the US dollar in the second half of the week.

Looking ahead, it’s set to be a busy week for the GBP/USD exchange rate, with a slew of both UK and US data set to be released and all eyes on the Fed’s upcoming rate decision.

Outside of the Fed meeting however, the US Dollar may also be driven higher by the latest US CPI figures, with inflation expected to have climbed from 2 per cent to 2.2 per cent in November.

Meanwhile, the Bank of England (BoE) will also hold a policy meeting this week and while the bank is not expected to raise rates in December, investors will be keen to find out whether the recent Brexit deal will alter its monetary policy plans for the coming