Pound-to-Dollar Remains Bid on Washington Drama - Flynn Plea, Tax Bill and Tillerson's Departure in Focus

"Sufficient progress" in Brexit negotiations and instability in Washington, at a pivotal time for the White House's tax bill, could push GBP/USD to even higher levels. 

The Pound remains bid against the Dollar going into the close of the week, after drawing support from renewed concerns over the stability of President Trump's administration in Washington.

Already under pressure from uncertainty over whether Senate republicans would meet their end of the bargain in the tax reform saga, amid reports of the possible departure of secretary of state Rex Tillerson, the Dollar was knocked by the latest development in the “Trump-Russia” probe Friday.

Former White House national security adviser, General Mike Flynn, pled guilty in court Friday to making false statements to the FBI, relating to his contacts with the Russian ambassador shortly after President Trump won the November 2016 election.

Flynn is the second person connected to the serving president to face charges following a special investigation into alleged interference by the Russian government in the 2016 election.

Paul Manafort, one of President Trump’s early campaign managers, was charged with money laundering and acting as an unregistered agent of the Government of Ukraine.

None of the charges brought to date have a direct bearing on the question of whether there was or wasn’t “collusion” during the campaign. The White House was reported to have said in a statement that General Flynn is the only person implicated by his guilty plea. 

After falling throughout the noon session, the Pound-to-Dollar rate pared much of its loss around the London close, to be quoted at 1.3512 - down jut 0.12% for the session. It has gained 1.37% in the last week and is up 9.5% for the 2017 year to date.

Above: Pound-to-Dollar rate shown at half-hour intervals.

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Tax Reform in the Bag?

The senate is scheduled to vote on its own version of the Tax Cuts and Jobs Act at 11:00 am Eastern time Friday.

The bill’s clearing of the senate gauntlet will pave the way for a joint committee of senate and house republicans to sit down and craft a unified bill that can gain widespread support across congress.

Friday is, therefore, a pivotal moment for the tax reform narrative that has propped up the Dollar in recent months, but it won’t be plain sailing.

Comments by Republican Senator Susan Collins, at a Christian Science Monitor breakfast, appeared to put pressure on the Dollar Thursday and this has spilled over into the Friday session.

Senator Collins has voiced opposition to some elements of the tax bill currently working its way through congress and suggested, Thursday, her vote for it might be contingent on concessions around healthcare reform.

Republicans have 52 of the 100 seats in the senate. 46 are held by the Democratic Party and 2 are held by independent senators. There have been persistent concerns that some republicans could vote against the tax bill.

"The currency had already reacted very sensitively to the news flow out of Washington yesterday," says Thu Lan Nguyen, a strategist at Commerzbank. "If the vote would have to be postponed today after all because sufficient votes cannot be secured the disappointment on the market is likely to be even more pronounced."

While the Dollar has been hit by uncertainty over the bill in recent trading, there are grounds to think this may have been an overreaction.

Republican senate majority leader Mitch McConnell said Thursday he expects the tax plan to pass a senate vote.

Meanwhile, another rebel senator and perennial threat to the bill, John McCaine, said in a statement Thursday he will support the bill at Friday's vote.

Nonetheless, the Dollar's headache doesn't end there because, adding further to its woes, the New York Times has reported Thursday the White House is preparing to replace secretary of state Rex Tillerson.

Tillerson, former CEO of Exxonmobil, is one of few credible big-business faces to have signed on with the new administration. His loss could place a new question mark over the stability of the Trump administration, meaning more uncertainty for the Dollar. 

White House press staff said in their daily briefing Thursday; "There are no personnel announcements at this time. Secretary Tillerson continues to lead the State Department." 

Questions over Tillerson’s future follow earlier concerns over whether the administration would be able to retain Goldman Sachs president Gary Cohn.

The Dollar sold off sharply on Thursday and continued to weaken overnight and into Friday's session. This saw both the Pound-to-Dollar and Euro-to-Dollar rates renew their earlier advances throughout the Friday morning.

Above: Pound-to-Dollar rate shown at hourly intervals.

 

"Sufficient Progress" and Irish Border in Focus

The Pound has been boosted in recent days by signs of “sufficient progress” being reached in Brexit negotiations, which strategists say could drive the Pound-to-Dollar rate as high as 1.3700 before year-end.

However, it remains vulnerable to Brexit-related developments Friday as European Council President Donald Tusk is set to meet Irish Prime Minister Leo Varadkar Friday to discuss the Republic of Ireland's concerns over the border with Northern Ireland. 

Wednesday, a Times report suggested the UK government and Brussels could be nearing an agreement on how to avoid physical infrastructure at the Northern Irish border, which would resolve one of the three key hurdles to talks moving onto the subjects of trade and transition. But whether the government's proposals are enough for Varadkar remains to be seen.

This followed a The Telegraph report, on Tuesday, that Theresa May has agreed a methodology to calculate the so called “Brexit bill”.

This could result in the UK making payments to Brussels worth close to €100 billion in total and €55 billion after adjustments and deductions are taken into account, but it may also resolving another of the three challenges to broadening the scope of talks.

That said, safe passage to even higher levels for Sterling is far from guaranteed, as was made clear by an ominous warning from the UK government’s confidence and supply partner, the DUP Thursday.

Sky News reported Thursday that DUP leader Arlene Foster has warned the government against an agreement with EU officials that would oblige Northern Ireland to abide by single market and customs union rules, saying it could "destabilise" the confidence and supply deal that has kept Prime Minister Theresa May in power since the June election.

The Northern Irish border is among the greatest stumbling blocks in the Brexit negotiations so far. For the sake of the peace agreement that has quelled earlier sectarian violence in Northern Ireland, it is necessary to avoid a border with physical infrastructure such as checkpoints. 

However, this throws up issues such as the integrity of the EU single market and customs union, as well as those of the UK. The government has said it will not accept a sea border between the Britain and Northern Ireland.

This is while the government of the Republic of Ireland has threatened to veto, at the European Council in December, negotiations moving onto the subjects of trade and transition. 

Political instability has been a recurring theme for the Pound throughout recent months as doubts have repeatedly emerged over the government's ability to cling to power and continue with negotiations over the UK's departure from the EU. 

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.