GBP/USD: Pound Rebounds From October Lows As Brexit Talks Begin, PMI’s Up Next

After dropping lower overnight, the pound is rebounding versus the US dollar in early trade on Monday.

The pound to US dollar exchange rate declined by 0.37%; its third straight week of losses last week hitting a 4-month low of US$1.2725.

As of 07:35 UTC GBP/USD is trading higher at US$1.2823.

Pound Holds $1.28 As Brexit Talks Take Centre Stage

The pound has been driven by fiscal stimulus expectations ahead of this month’s budget and by expectations surrounding EU- UK post Brexit trade negotiations. The pound dropped steeply in the previous week when Prime Minister revealed the UK mandate for the negotiations and a hardening of stance.

Boris Johnson warned that the UK will walk away from talks in June if insufficient progress had been made. This raises the prospect of UK would leaving the transition period on 31^st December on World Trade Organization rules. Chief EU negotiator Michel Barnier also chimed in saying that the talks would be “very tough”, dampening demand for sterling.

In addition to any headlines on the trade talks, investors will also be looking towards the release of the UK Manufacturing PMI. Analysts are forecasting activity in the sector to remain steady at 51.9 in February. The figure 50 separates expansion from contraction. A stronger reading could help at least limit sterling’s losses.

Rate Cut Expectations Rise

The spread of coronavirus, its impact on equities and what the Federal Reserve intends to do about it are the central focus for dollar investors right now. Investors are growing more convinced that the Federal Reserve will cur interest rates by 25 basis points at the March meeting. The probability of such a move jumped from 23% last Monday to 95% today after Fed Chair Jerome Powell hinted of easing action in a speech on Friday.

Over the weekend China released its Manufacturing PMI for February which plunged to 35.7, its lowest level ever. Factory activity fell faster than during the 2008 financial crisis. This is one of the first economic indicators published since the outbreak and shows confirms fears that the hit on the economy will be deep. With the number of cases increasing in US, investors fear that the US economy could be next.

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