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Pound Vs Dollar at 1-Week High, as Trump Ramps Up Trade War

Market CommentaryPound Vs Dollar at 1-Week High, as Trump Ramps Up Trade War
Pound Vs Dollar at 1-Week High, as Trump Ramps Up Trade War
Pound Vs US Dollar.

The pound vs dollar interbank exchange rate has hit 1.2204 in the last day. This is its highest in over one week, or since July 31st.

By comparison, back on August 1st, British sterling was as weak as 1.2090 versus the greenback. So it’s since risen by +0.94%, or over one cent.

This could benefit you, if you’re a Briton emigrating to the USA, or a UK business owner making international payments to America, to import US products.

This is because, when you transfer money to your US bank account, you might now get a higher dollar total, compared to if you’d exchanged currencies in the past week.

In turn, this would make it more affordable for you to emigrate to the United States, or cut your currency for your business costs to ship US goods to the UK.

However, it’s important to contextualise British sterling’s gains versus the mighty buck. At the start of the year, the pound vs dollar interbank exchange rate stood at 1.2737.

So as a result, since January 1st 2019, the pound has lost -4.18% against the greenback, or over -5 cents. We’ll look at some of the reasons for sterling’s losses in this article.

To stay up-to-date with the pound vs US dollar interbank exchange rate, visit Pure FX’s Rates & Tools page. Here, select ‘GBP’ to ‘USD’ to see the interbank rate for the last week.

Also, to check what’s influencing the value of sterling against the greenback, visit our GBP to USD Exchange Rate Updates page. Here, click on the latest article to read the recent news.

A first factor why British sterling has reached this one-week high against the US dollar is because US President Donald Trump has intensified his trade war with China, say new reports.

A second reason why the pound vs dollar interbank exchange rate has strengthened is because the UK’s dominant services sector unexpectedly strengthened in July, say recent statistics.

However, looking ahead, the pound’s value versus the dollar might be influenced, because there’s a rising probability that there’ll be a ‘No Deal’ Brexit by the deadline of October 31st.

Let’s take a closer look at these reasons why the pound has risen versus the US dollar, and what might influence the interbank exchange rate, looking forward, for your money transfer to the USA.

Pound Vs Dollar Strengthens, as Trump Intensifies Trade War with China

As I mention, a first reason why the pound vs US dollar interbank exchange rate has reached this one-week high is because US President Donald Trump has ramped up his trade war with China, say new reports.

This has weakened the US dollar, because it’s feared that President Trump’s tariffs might weaken the US economy, and oblige the Federal Reserve to further cut interest rates.

Last Thursday 1st August, President Trump announced that the USA will impose 10% tariffs on an extra $300 billion worth of Chinese imports to the United States. Already, the USA levies a 25% tariff on $250 billion of Chinese shipments to America.

So the USA will now charge tariffs on virtually all Chinese imports, which in 2018 reached a value of $539.7 billion, reports The Guardian.

The US President has imposed these new tariffs on China, because Mr. Trump is dissatisfied with China’s progress at the two countries’ recent trade talks.

In particular, so far China has committed to stop manipulating the value of its currency, the yuan, and buy vast quantities of American farm goods, in particular soy. Yet China has been slow about meeting this aims.

Given this, President Trump has announced these new tariffs, to put pressure on the Chinese. The US Commander-In-Chief’s hope is that, when the Chinese see that America’s tariffs are weakening China’s economy, they’ll be likelier to agree a trade deal.

Already, President Trump has successfully used this strategy, to reach a new trade agreement with Canada and Mexico.

However, while the President’s tariffs are intended to pressure the Chinese, they may simultaneously weaken America’s economy.

This is because, when Mr. Trump imposes levies on China’s imports, these products become more expensive to buy in the USA’s shops for consumers. So for Americans to keep buying these same Chinese goods, they have to spend more money.

In turn, when Americans have to spend more money to buy China’s imports, they have less money to spend elsewhere. So this could slow the USA’s consumer spending, which makes up a vast section of America’s economy.

So to sum up, there’s a risk that Mr. Trump’s tariffs could backfire, by slowing the USA’s GDP (Gross Domestic Product) growth. This has weakened the US dollar.

Sterling Gains Against Greenback, as Fed May Cut Interest Rates Further

To compensate for President Trump’s tariffs, America’s central bank, the Federal Reserve, might feel obliged to cut interest rates. Already last week, the Fed reduced interest rates for the first time in a decade, by -0.25% to 2.00%-2.25%.

The Fed said that, in part, this was because the President’s trade war was weakening the global economy, requiring more monetary support for the USA.

Looking ahead, if the Fed thinks that the US economy is slowing because of Mr. Trump’s tariffs on China, it could cut interest rates again, perhaps in September or October, reports Yahoo Finance.

When the US central bank cuts interest rates, this supports America’s economy, because this reduces borrowing costs. In turn, Americans’ mortgage repayments fall, and paying back credit card debt becomes cheaper.

That said, while a Fed rate cut might support America’s economy, and alleviate Mr. Trump’s levies on China, this simultaneously devalues the US dollar.

This is because, when US interest rates fall, it’s less profitable for the world’s money managers to invest in US dollar-denominated assets. This is because they get lower returns on investment. This thereby weakens the greenback.

GBP to USD Exchange Rate Rises, as UK Services PMI Strengthens

In addition, another reason why the pound vs dollar interbank exchange rate has reached this one-week high is because the UK’s vast services sector accelerated in July, said trusted new statistics this week.

The UK’s services sector makes up 80% of the economy, so this encouraging performance his lifted hopes that Britain’s economy isn’t contracting, even with Brexit uncertainty.

According to economics watchdog IHS Markit this Monday 5th August, the UK’s services PMI (Purchasing Managers’ Index) reached 51.4 last month.

This is comfortably above the financial markets’ forecasts for 50.4, as well as June’s result of 50.2. It’s also well beyond the 50.0 figure that separates growth from contraction, and a nine-month high in the survey.

UK services activity expanded faster in July, because there was an increase in overseas orders, says IHS Markit’s survey of businesses. In particular, IHS Markit reported that:

"A number of survey respondents commented on improved sales to clients in external markets, helped by the weak sterling exchange rate against the euro and US dollar." So the weak pound is lifting sales.

These upbeat statistics have lifted the pound, first because they tell us that the UK’s dominant sector continues to grow, even with Brexit uncertainty.

For example, Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, said about this data that it "does provide some reassurance that the economy isn’t on a downward spiral and doesn’t require fresh monetary stimulus."

So the UK’s services growth might compensate for the ongoing contraction British manufacturing and construction output. This may ensure that UK GDP continues to expand in the second half of 2019.

In turn, this may encourage the Bank of England to keep UK interest rates at their current 0.75%, rather than cut them. So this has contributed to strengthen the value of sterling versus the US dollar.

Sterling to US Dollar Might Be Influenced, as ‘No Deal’ Brexit Looks Likelier

However, as I wrote at the start of this article, sterling’s recent gains against the US dollar should be viewed in context.

Although British sterling has gained over one cent versus the greenback this week, to reach a one-week high, so far in 2019, the pound vs dollar interbank exchange rate has still weakened by -4.18%, or by over five cents. In large part, this is because of Brexit.

Looking ahead, the pound’s value against the US dollar might be influenced, because new UK Prime Minister Boris Johnson looks increasingly determined to achieve a ‘No Deal’ Brexit.

This is when the UK would exit the EU without an agreement, by the extended deadline of October 31st. We’d cut off our existing economic and political ties with Europe, with no future arrangements in place.

The upside of a 'No Deal’ Brexit is that the UK would be a fully sovereign nation. We could pass our own laws without Brussels’ interference, set independent trade tariffs, and reach new trade agreements with countries like the USA, Australia or India.

On the other hand, we’d have to pay higher tariffs to send exports to Europe, with whom currently we do roughly half our international trade.

British sterling has lost value in 2019 as it’s become likelier that there’ll be a ‘No Deal’ Brexit, because the financial markets and many UK companies are worried that it would hurt the UK’s future economic prosperity.

In part, this is because the UK would pass from forming part of the world’s largest trading bloc, the EU, with 28 members, to trading on worse World Trade Organisation (WTO) terms.

Pound Vs Dollar Could Be Affected, if Boris Stays On After Vote of ‘No Confidence’

It now looks likelier that there’ll be a ‘No Deal’ Brexit, In part because the Prime Minister’s Special Advisor, Dominic Cummings, has announced that, even if Parliament votes down Mr. Johnson’s government in a vote of ‘No Confidence’, Mr. Johnson may not resign.

Instead, the UK constitution technically allows Mr. Johnson to remain in power, so that he could achieve a ‘No Deal’ Brexit.

The Prime Minister could remain in Number 10 Downing Street, even if he losses a vote of ‘No Confidence’, because of a technicality in Britain’s constitution.

To be specific, “In terms of a strict reading of the legislation, Boris is not required to resign. It is completely silent on all of this. The onus is on the incumbent prime minister — they get to choose whether they resign,” says Catherine Haddon, a senior fellow at the Institute for Government think tank, to The Times.

With this in mind, even if Parliament calls a vote of ‘No Confidence’ in the government, and Conservative MPs rebel against Mr. Johnson to bring down his government, Mr. Johnson could cling on to power, to pursue a ‘No Deal’.

However, if Mr. Johnson does this, it would break long-held convention, and bring on a constitution crisis in the UK. This may influence sterling too.

So far, we know that Mr. Johnson’s government is committed to exiting the EU by October 31st, with or without a deal. Yesterday, a Downing Street spokesperson confirmed that we’ll by leaving by that date “no ifs, no buts”.

However, between now and then, the Prime Minister could have to battle MPs to carry out a ‘No Deal’, and Parliament may try to bring down Mr. Johnson’s government.

Parliament returns from its Summer recess on September 3rd, by which time there’ll be less than two months before the Brexit deadline. This uncertainty may influence the value of the pound, looking forward.

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Please bear in mind, this article is Pure FX’s opinion only and does not constitute advice. Moreover, the exchange rates referred to in this article are the interbank rates, which are the rates at which banks and financial institutions buy and sell currency to each other. Therefore these exchange rates cannot be accessed by individuals or SMEs, and are not the same rates that Pure FX can offer. To get a free exchange rate quote, call us on +44 (0) 1494 671800, or email peter.lavelle@purefx.co.uk.

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