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Pound Vs US Dollar at 1-Week High, as Fed Cuts Interest Rates

Market CommentaryPound Vs US Dollar at 1-Week High, as Fed Cuts Interest Rates
Pound Vs US Dollar at 1-Week High, as Fed Cuts Interest Rates
Pound Vs US Dollar.

The pound vs US dollar interbank exchange rate stands at 1.2943 today at the time of writing. This is its highest in over one week, or since October 22nd.

By comparison, back on October 29th, British sterling was as low versus the so-called greenback as 1.2809. So the pound has since risen by over one cent, or by 1.04%.

This could benefit you, because when you transfer money to the USA, you might get a higher US dollar total, compared to if you’d exchanged currencies in the last week.

In turn, this may make it more affordable for you, if you’re buying property abroad in New York, or if you’re a UK business owner making international payments to America.

To stay up-to-date with the pound vs US dollar interbank exchange rate, visit Pure FX’s Rates & Tools page. Here, select ‘GBP’ (Great British Pound) to ‘USD’ (United States Dollar).

Also, to check what’s influencing the value of sterling versus the so-called mighty buck recently, go to our GBP to USD Exchange Rate Updates page. Here, simply click on the latest article.

One reason why the pound has hit this one-week high against the US dollar on the interbank market is because, yesterday, the US Federal Reserve cut interest rates by 0.25%, to 1.5%-1.75%.

Another factor why the sterling vs US dollar interbank exchange rate has strengthened is because a US official has warned that the USA and China may not sign a trade war truce next month.

Looking to the next six weeks, the GBP to USD interbank exchange rate could be influenced, because the UK is due to hold a general election, which it’s hoped will be the Brexit “end game”.

Pound Vs US Dollar Rises, as Fed Cuts Interest Rates to 1.5%-1.75%

As I mention, one reason why the sterling vs dollar interbank exchange rate has hit this one-week high today is because, yesterday, America’s central bank, the Federal Reserve (Fed) cut interest rates by -0.25%, to 1.5%-1.75%.

This has weakened the US dollar, because lower interest rates make investing in American assets less profitable for markets, cutting demand for the US dollar.

The Fed’s decision to cut interest rates on Wednesday 30th was the US central bank’s third consecutive cut, following July’s and September’s reductions in borrowing costs too.

The decision was widely forecast by financial markets, as Fed Chairman Jerome Powell has previously signalled that the Fed is engaging in a “mid-cycle adjustment” to support the United States’ economic growth.

The US central bank’s decision has weighed down the US dollar, because lower interest rates are traditionally considered a sign of economic weakness. After all, they signal that the US economy needs greater monetary support to expand.

Elsewhere for instance, both the Eurozone’s and Japan’s interest rates are at all-time lows of 0.0% or below, and these economies are near-stagnant.

Importantly, the US central bank signalled yesterday that it’s unlikely to cut interest rates further for the time being.

In the Fed’s accompanying statement, the central bank removed the phrase that it will “act as appropriate to sustain the expansion” that it’s previously used to signal future interest rate cuts. Instead, the Fed said that it will monitor “incoming information” before acting.

More straightforwardly, Mr. Powell told journalists in his press conference after the Fed’s interest rate cut that he “sees the current stance of monetary policy as likely to remain appropriate,” reports CNBC.

With this in mind, although the financial markets had forecast a 97% chance of yesterday’s interest rate cut, investors think that there’s just a 25% chance that the Fed will cut again, in December.

It’s worth adding that, in the Fed’s accompanying statement, it continued to describe the US labour market as “strong”, while economic growth “is rising as a moderate pace”.

So this explains why, although the US central bank has cut interest rates, America’s borrowing costs remain well above those elsewhere in the industrialised world, such as the UK, Eurozone, Australia or Japan.

Nonetheless, as I say, the Fed’s decision to cut interest rates will make investing in US dollar-denominated assets less profitable for the world’s money managers now.

This could encourage investors to take assets out of America, to place them elsewhere, where the return on investment is higher. In addition, demand for the US dollars may fall, thereby weakening the greenback.

GBP to USD Gains, as USA/China Trade Pact “May Not Be Ready” for November

Furthermore, another factor why the pound vs US dollar interbank exchange rate has reached this one-week high is because a US official warned yesterday that the USA’s and China’s trade truce pace “may not be ready” to sign in November, as previously expected.

This has dragged lower the US dollar, because if the USA and China don’t sign their trade pact, the US economy may slow.

On Wednesday 30th October, an anonymous US official told respected financial news source Reuters that:

“If the [USA/China trade pact] is not signed in Chile, that doesn’t mean that it falls apart. It just means that it’s not ready. Our goal is to sign it in Chile. But sometimes texts aren’t ready. But good progress is being made and we expect to sign the agreement in Chile.”

This has weakened the US dollar, because until now, there was every indication that US President Donald Trump and China’s President Xi Jinping, the leaders of the world’s two largest economies, would sign their trade pact next month.

The anonymous US official’s comments are the first “official” sign that the pact could be delayed, thereby further extending the trade war.

Over the last 16 months, the USA and China have imposed tariffs worth hundreds of billions of dollars on each other, hurting relations between the two powers and weakening the world economy.

According to the IMF (International Monetary Fund), global GDP (Gross Domestic Product) will rise the least since the 2008/9 financial crisis this year, in part because of the trade war.

With this in mind, last month Mr. Trump and Mr. Xi reached what’s called the “first phase” trade pact.

According to US sources familiar with its terms, China will buy more US agricultural goods, particularly soy. Also, China will increase its intellectual property protections, stop manipulating its currency, and give American companies greater access to China’s financial services market.

So the US dollar has weakened, because of the possibility that the trade pact might not be signed next month.

This is because, first, America’s manufacturing sector has decelerated rapidly in recent months, like elsewhere in the world, because global demand for goods has fallen. Second, without the trade pact, America’s access to China’s vast economy looks set to remain limited.

Sterling Vs US Dollar Rate May Be Affected, as UK to Hold General Election

Elsewhere, looking over the next six weeks, the pound’s value against the mighty buck on the interbank market may be affected, because the UK will hold a general election on December 12th. This will be the UK’s first December election in almost a century, since 1923.

For the financial markets, it’s hoped that this will signal the end of Brexit, and the start of UK/EU future trade talks.

To explain, this Tuesday 29th MPs in the House of Commons voted by 438 to 20 to hold a general election on December 12th.

UK Prime Minister (PM) Boris Johnson wants to go the ballot boxes, to regain his Conservative Party’s lost Parliamentary majority, and pass his Brexit deal. Meanwhile, the opposition Labour Party may pursue a “softer” Brexit, like staying in the EU Single Market.

According to the latest surveys, Mr. Johnson’s Tories enjoy a clear lead. The Conservatives are polling at 35%, 10% ahead of Labour’s 25%, while the Liberal Democrats stand at 18%, and Nigel Farage’s Brexit Party at 11%.

Traditionally, a 10% lead has been enough for the winning party to gain a majority of MPs in the House of Commons, to pass legislation without opposition support.

However, it’s important to note that, although the polls suggest that Mr. Johnson’s Conservatives will win a majority in December, this is not guaranteed.

After all, before the 2017 general election, most polls predicted that former PM Theresa May would win a large majority, and Mrs. May ended up with a minority government, dependent on Northern Ireland’s Democratic Unionists.

In addition, the UK’s most respected pollster, Sir John Cutice, forecasts that this election will deliver another hung Parliament, in which no single party gains a majority.

In these circumstances, Mr. Johnson could continue to find himself unable to pass his Brexit deal, in which case the EU might have to further extend the UK’s Brexit deadline, beyond the new limit of January 31st.

For example, Mikael Olai Milhøj at Danske Bank says that "The seat projections were way off in 2017 except for the YouGov election model, which was the only one that predicted the Conservatives would lose the absolute majority.”

“One of the problems for the projections last time was that the turnout was higher than expected (68.8% vs 66.2% in 2015) the highest since 1997.”

With this in mind, the pound vs US dollar interbank exchange rate might be affected, because the general election adds to the UK’s political uncertainty.

Although the Conservatives look set to win, according to the latest polls, the polls are frequently wrong, while the UK’s leading expert predicts that there’ll be a hung Parliament. So the results on December 13th may be worth watching.

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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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