Markets have been spooked this week by comments from international trade secretary Liam Fox who suggested that there was now a 60 per cent chance of the UK leaving the EU without a new deal in place.
While most observers speculate that the odds aren’t quite that bad, a lack of progress in negotiations has done little to inspire confidence in the pound, which has fallen over 10 cents against the US dollar since April.
And there may be worse to come as well, with analysts forecasting that in the event of a ‘no-deal’ Brexit the pound US dollar exchange rate could fall as much as 10 per cent.
On the flip side should Theresa May achieve a breakthrough in negotiations with the EU and avoid a ‘no-deal’ Brexit analysts predict the pound US dollar could rise as high as $ 1.39.
Meanwhile, the US dollar has been buoyed this morning by further safe-haven demand as US-China trade tensions flared once again.
Washington announced it would impose 25 per cent tariffs on a further $ 16bn worth of Chinese goods overnight on Tuesday as the US trade spat with China continues.
Markets fear that the trade dispute is only set to worsen as well as the US plans to target a further $ 200bn of China exports later in the year, pushing the two sides dangerously close to a full blown trade war.
Such an outcome is likely to prove negative to global growth, so investors are flocking to the US dollar on hopes it will be less exposed to the fallout.
Looking to the second half of this week’s session, the pound US dollar exchange rate may finally begin to rally with the release of the UK’s latest GDP figures.
Economists forecast the data will reveal that the UK economy expanded 0.4 per cent in the second quarter, up from 0.2 per cent at the start of the year after the adverse weather brought the country to a standstill.
However, any gains in the pound could be quickly eliminated by the release of the latest US CPI figures, with another rise in US inflation in July likely to bolster the US dollar.