GBP/USD: Boris’ Brexit Climbdown Insufficient To Keep Pound Afloat

Boris gave, Powell took it away – UK Prime Minister Boris Johnson agreed to compromise on the controversial Brexit bill and sent the pound higher before the Federal Reserve boosted the dollar. Politics are set to outweigh economic figures in rocking the pound in the last full week of September.

This week in GBP/USD: Brexit hopes vs. Fed fallout

Brexit: The controversial Internal Markets bill passed its first hurdle in the House of Commons, initially sending down the pound. The legislation knowingly violates the Brexit Withdrawal Agreement that PM Johnson signed with the EU last year. Investors feared that negotiations would imminently collapse. An insufficient amount of Conservative Party “rebels” voted against the bill.

However, the PM later reached a compromise with these rebels, agreeing to grant parliament a greater oversight role over applying the law. The news has pushed the pound higher, yet Brussels has yet to respond. It seems that EU officials are waiting to see the text of the modified bill – or perhaps holding their criticism before it turns into law.

On the other hand, Chief EU Negotiator Michel Barnier said there is a “glimmer of hope” on the politically sensitive fisheries issue, providing support to sterling. Moreover, European Commission President Ursula von der Leyen said she is “convinced” a deal is still possible.

Then came the central banks, both downing cable. The Federal Reserve signaled it would leave rates unchanged through 2023 – but refrained from offering any imminent support despite conveying a message of concern and uncertainty. The Fed expects a softer contraction in 2020 but a shallower recovery in 2021.

Jerome Powell, Chairman of the Federal Reserve, seemed to throw the ball into lawmakers’ court without acting. Stocks dropped and he safe-haven dollar advanced.

Indeed, the chances for additional fiscal stimulus have risen after the US reported weak retail sales figures for August. Reports on Capitol Hill suggest a package worth $1.5 trillion is cooking.

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