PureFX

What’s Set to Affect the Pound to US Dollar Exchange Rate?

Wed 1st August 2012

By Peter Lavelle

If you plan to emigrate to the United States, getting a good US dollar exchange will doubtless be one of your top priorities. After all, the more US dollars you get for your pounds, the better a position you’ll find yourself in when you arrive, whether you’re buying a house in the States or otherwise.

With that in mind then, you might be interested to know what’s set to affect the pound to US dollar exchange rate in the coming weeks. What’s in store, and will it help you get a better exchange rate?

1. The Bank of England makes its latest interest rate decision.

When? Thursday 2nd August 2012 at 12.00 BST.
Importance? High.

The Bank of England will decide whether to cut interest rates to 0.0% in the UK this week. If it does, that could weaken the pound against the buck, as it further diminishes the returns financial investors can expect for putting money in the UK.

But is it likely to happen? Perhaps not. Though the UK contracted –0.7% in Q2, suggesting the need for some support, the central bank has already taken steps. This includes its £80bn Funding for Lending scheme, whereby banks can enjoy reduced borrowing costs if they lend more to small businesses.

The Bank of England will want to see if this succeeds first, before embarking on other measures. That in turn should support the pound.

2. The Federal Reserve makes its interest rate decision too.

When? Wednesday 1st August at 19.15 BST.
Importance? High.

Fed chairman Ben Bernanke meanwhile will decide whether to initiate more quantitative easing today, in an effort to support the US economy. If he does so, we can expect the US dollar to weaken, as the prospect of several hundred billion dollars being injected into the world economy buoys confidence.

Yet, though the US arguably needs QE3 (given that growth slowed to just 1.5% in Q2) Mr. Bernanke might not do it. This is because QE3 at this stage would boost the electoral hopes of President Barack Obama, as he benefits from the pick-up in growth and job creation.

Given that, the US dollar might in fact strengthen this afternoon, as the market reacts to the Fed’s ‘non-announcement’ with disappointment.

3. The Eurozone is aiming to set up a banking union.

When? Throughout the next fortnight, if not beyond.
Importance? High.

In the past week, Eurozone leaders have been several comments about the importance of shoring up their currency union. This includes European Central Bank president Mario Draghi telling us he’ll do “whatever it takes” to preserve the euro, and Italian prime minister Mario Monti saying he sees “light at the end of the tunnel” for the crisis.

Obviously, if the continent moves beyond such rhetoric and actually gets on with making substantial improvements, that would benefit the euro. Yet why would it affect the pound to US dollar exchange rate? This is because of the UK’s geographic and economic proximity to the Eurozone, whereby what happens on the continent has a big impact on Britain.

If the Eurozone sorts itself out, we can expect the pound to soar against the US dollar then - ‘if’ being the crucial word here.

Get in Touch

I do hope this post has been of interest.

To find out how this data has affected your foreign exchange transactions, call us on +44 (0) 1494 671800 or email enquiries@purefx.co.uk. You can also visit us at foreign exchange specialist Pure FX. We’d be delighted to help with your enquiry.