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Pound Vs Dollar Near 6-Week High, as MPs Block ‘No Deal’

Market CommentaryPound Vs Dollar Near 6-Week High, as MPs Block ‘No Deal’
Pound Vs Dollar Near 6-Week High, as MPs Block ‘No Deal’
Pound Vs Dollar.

The pound to US dollar interbank exchange rate has reached 1.2343 today, very close its highest in six weeks, or since July 29th.

By comparison, sterling was as low as 1.1967 against the greenback on Tuesday 3rd September, so it’s since strengthened by +3.14%, or close to +3.70 cents.

This could be helpful for you, if your son or daughter needs currency for tuition fees to study at a US university, or you’re a UK business owner making regular payments to the USA.

This is because, when you exchange pounds for US dollars, you might now get a higher dollar total in your United States bank account, compared to if you’d done so in the last six weeks.

In turn, this could reduce the tuition fee costs for your son or daughter to study at a US university, or increase your US dollar total when you make regular payments for your British company.

To stay up-to-date with the value of sterling against the buck on the interbank market, visit Pure FX’s Rates & Tools page. Here, select ‘GBP’ to ‘USD’ to see this week’s interbank rates.

Also, to check what’s affecting the pound vs dollar interbank exchange rate recently, visit Pure FX’s GBP to USD Exchange Rate Updates page. Here, click on the most recent article.

A first reason why the pound has neared this six-week high versus the US dollar today is because, last week, MPs in the House of Commons voted to extend the UK’s Brexit deadline.

A second factor why sterling has strengthened against the buck is because, last week, the USA and China agreed to resume their trade negotiations, cutting demand for haven currencies like the US dollar.

A third partial explanation why the GBP has risen in value versus the USD is because there’s been renewed speculation that America could enter a recession in the next couple of years.

A fourth influence why the British pound sterling has gained against the United States dollar is because it’s thought that the US Federal Reserve could cut interest rates again later this month.

Please find below a closer look at why the pound vs dollar interbank exchange rate has neared this six-week high. You might find this useful, for when you transfer money to the USA.

Pound Vs Dollar Strengthens, as MPs Vote to Extend Brexit Deadline

As I’ve mentioned, a first reason why the pound to US dollar interbank exchange rate has neared this six-week high in the past day is because, last week, MPs in Parliament voted to extend the UK’s Brexit deadline.

This has strengthened the pound, because it’s thought that this makes it likelier that the UK will eventually leave the EU with an agreement, rather than ‘No Deal’.

To be specific, last Wednesday 4th September, MPs in the House of Commons voted by 329 to 300 to oblige Prime Minister (PM) Boris Johnson to request a second extension to Article 50, the UK’s Brexit negotiating timetable, reports the BBC.

Now that the bill has passed the Commons and the House of Lords, it’s with the Queen, who’s expected to give the bill her Royal Assent.

In particular, it’s thought that a majority of MPs wish to extend the UK’s Brexit deadline for another three months, up to January 31st. This will give MPs time to debate what sort of Brexit they want, call a second referendum, or arrange a general election.

The Commons’ decision circumvents PM Johnson’s decision to prorogue Parliament, from September 14th to October 12th.

The financial markets have welcomed the House of Commons’ vote, because if the UK exits the EU with a deal, it’s believed that this will favour the UK’s future economic growth.

After all, we currently form part of the EU’s Single Market, and trade with Europe without tariffs or bureaucracy. Any post-Brexit deal that mimics our current relationship is thought to be positive.

However, it’s worth noting that a conclusion to Brexit remains very much up-in-the-air. This is because, first, PM Johnson said in a speech in Yorkshire last Thursday that he’d rather be “dead in a ditch” than request a second Article 50 extension, according to The Guardian newspaper.

So it’s unclear if, when the MPs’ bill becomes law, Mr. Johnson will ignore it, resign, or change tac and go to Brussels to request more time.

In addition, 21 Conservative MPs rebelled against the government last week to support extending Article 50, and in turn Mr. Johnson has expelled all these MPs from the Tory Party. As a result, the PM is seeking to call a general election, to regain his Parliamentary majority.

The opposition Labour Party has said that they’ll support this motion, as soon as the bill blocking ‘No Deal’ enters the statute books, so this may affect the value of sterling.

GBP to USD Gains, as USA and China Announce Fresh Round of Trade Talks

In addition, a second factor why the pound vs dollar interbank exchange rate has neared this six-week high today is because the United States and China have announced that they’ll hold a new round of trade talks in the near future.

This has weakened the US dollar, because this encouraging trade news reduces investors’ demand for the US dollar as a safe haven currency.

Last Thursday 5th September, the United States’ and China’s chief trade negotiators held a phone call, in which they agreed to create the favourable conditions necessary to hold trade talks in person, in early October, reports respected financial news source Bloomberg.

In particular, China’s Vice Premier Liu He, US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin held the phone call yesterday.

If the planned trade talks materialise, this would be the USA’s and China’s first high-level in-person trade talks, since failed discussions in late July. Also, this would be the 13th round of high-level trade talks between the world’s two largest economies.

Following the call, Vice Premier Liu He said that he’ll visit Washington “in early October,” though a concrete date has yet to be specified.

If Washington and Beijing take steps to resolve their trade conflict, this would benefit their economies, as well as the world’s trade outlook.

This is because, in recent months, America and China have imposed tariffs worth hundreds of billions of dollars on each other, while accusing each other of unfair trade practices, in an increasingly heated attempt to get the other country to back down.

For example, this past Sunday 1st September, President Donald Trump’s administration imposed a 15% duty on $112 billion of Chinese consumer goods imports to the USA. President Xi Jinping’s government responded by placing duties on US crude oil imports to China.

Moreover, the USA is due to lift tariffs from 25% to 30% on $250 billion worth of Chinese imports on October 1st.

However, while Washington’s and Beijing’s high-level phone call last week has renewed hopes that the trade war might be resolved, this has weakened the US dollar.

This is because, paradoxically, when the USA and China take steps to removing their tariffs off each other, fewer money managers want to hold the US dollar, as a safe haven from the uncertain trade outlook.

Sterling Rises Against US Dollar, as Fears of US Recession Grow

Furthermore, another explanation why the pound vs dollar interbank exchange rate has neared this six-week high is because there are growing concerns that the US economy might enter recession in the foreseeable future.

This has weakened the value of the greenback, because when the US economy enters recession, there are fewer investment opportunities for money managers.

The financial markets are increasingly worried that the world’s largest economy might contract in the next couple of years, first because a closely-watched model suggests that this may happen.

The New York Federal Reserve’s model, which has accurately predicted the last five US recessions, now predicts a 38% chance of a recession, the most since the 2008 global financial crisis, reports CNN.

Nicholas Colas, co-founder of DataTrek Research, said about this model that: "Anything over 30% is very bad. A lot of things have to go right to avoid a recession. We need a trade deal."

Also, the USA’s bond yield curve, in which it’s normally more expensive for the US government to borrow money for the long term than the short term, has inverted too, signalling a recession.

Moreover, last week we learnt that America’s vast services sector expanded at the slowest pace in three years, since March 2016, according to economics watchdog IHS Markit.

In particular, the pace of new job creation decelerated to the lowest since February 2010, the month before America’s current economic expansion, now the longest in the USA’s history, started.

Also, last week it was revealed that the United States’ manufacturing sector shrank for the first time in three years in August, said IHS Markit.

To be specific, new orders fell to their lowest levels since 2009. This suggests that the USA’s and China’s trade war is now negatively impacting America’s factory sector, and lifts the odds of a US recession. So this has weakened the US dollar.

Pound to Dollar Increases in Value, as Fed Tipped to Cut Interest Rates

Lastly, a fourth influence why the sterling vs US dollar interbank exchange rate has neared this six-week high today is because America’s central bank, the Federal Reserve, is being tipped to cut interest rates again later this month.

If so, this would suggest that America’s economy needs greater monetary support to prosper, and makes buying USD-based assets less profitable.

In particular, it’s believed that the Fed could cut interest rates by -0.25% to 1.75%-2.00%, when it next convenes on September 17th-18th, reports Fox Business.

America’s central bank might reduce borrowing costs, to protect the US economy from the rising effects of the trade war, plus external factors such as Brexit. Lower interest rates make borrowing money cheaper, thereby stimulating economic activity.

For example, St. Louis Fed President James Bullard told the Wall Street Journal last Wednesday that: “Markets are expecting a lot less inflation and a lot less growth than the Fed is.”

Meanwhile, New York Fed President John Williams said in a speech on last Wednesday that: “Our role is to navigate a complex and at times ambiguous outlook to keep the economy growing and strong.”

If the Fed reduces interest rates this month, it would be the US central bank’s second cut since the global financial crisis. This may point to US economic weakness, thereby weighing on the dollar.

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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 Contact Us.

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