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Pound Vs US Dollar Near 1-Week High, as UK to Hold Election

Market CommentaryPound Vs US Dollar Near 1-Week High, as UK to Hold Election
Pound Vs US Dollar Near 1-Week High, as UK to Hold Election
Pound Vs US Dollar.

The pound vs US dollar interbank exchange rate stands at 1.2905 today. This is its highest in close to one week, or since Thursday 24th October.

By contrast, yesterday, sterling was as low as 1.2809 versus the so-called greenback. So the pound has since strengthened by 0.75%, or close to one cent.

This may benefit you, because when you transfer money to the USA, you could get a higher US dollar total in your American bank account, compared to if you’d done so in the last week.

In turn, this could make it more profitable for you, if you’re buying property abroad in New York, or if you need currency for tuition fees, to send your son or daughter to Yale or Princeton.

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

Also, to find out what’s affecting the value of sterling versus the greenback recently, go to our GBP to USD Exchange Rate Updates page. Here, click on the most recent article for the news.

One reason for the gain GBP has made against the USD today is the fact the UK has announced that it will hold a general election in December, which it’s hoped will be the Brexit “end game”.

However, looking to today, the pound vs US dollar interbank exchange rate could be affected, because US economic growth data for the Summer is released, while US interest rates may fall.

Pound Vs US Dollar Nears 1-Week High, as UK to Hold Election in December

As I mention, one partial explanation why British sterling has neared this one-week high versus the US dollar today is because it looks like the UK will hold a general election in December.

In particular, it’s reported that the great British public will go to the ballot boxes on December 12th, shortly before Christmas. This will be the first December election in the UK in close to a century, reports the BBC.

To explain, the UK will go to the polls on December 12th, because yesterday a majority of MPs in Parliament voted for this.

This was Prime Minister (PM) Boris Johnson’s fourth attempt to convince MPs to hold an election and, on Tuesday, 438 MPs supported his motion, with just 20 opposed. This tells us that an ample majority of MPs now wish to fight an election over the coming six weeks.

PM Johnson has had to ask MPs’ permission to hold an election, because under the UK’s Fixed Terms Parliament Act, the UK can only go to the polls every five years, unless 2/3rds of MPs vote otherwise.

Until recently, opposition MPs refused to back Mr. Johnson’s calls, until the risk of a ‘No Deal’ Brexit was removed. This Monday, the EU extended the Brexit deadline, up to January 31st.

The news that we’ll hold a general election has lifted the pound, in part because it’s hoped that this will be the Brexit “end game”. In particular, Mr. Johnson’s Conservative Party will campaign on a platform of passing his recently-agreed Brexit deal.

Meanwhile, it’s thought that Jeremy Corbyn’s opposition Labour Party will seek a “softer” Brexit, if they manage to win a majority of MPs.

According to the latest polls, Mr. Johnson enjoys a clear lead over his rivals. The Conservatives are surveying at 37% of the vote, compared to Labour’s 24%, the Liberal Democrats' 17%, the Brexit Party’s 11%, and the Scottish National Party’s 4%.

Traditionally, a 10% lead has been enough to grant the leading party a majority, under the UK’s First-Past-The-Post electoral system.

So with this in mind, if Mr. Johnson wins a Parliamentary majority on December 12th, it’s hoped that his Tory Party will speedily approve his Brexit deal.

This will enable the UK to begin negotiating its future trade deal with the EU, as well as focus on its domestic agenda, such as schools, hospitals and transport. So the hope that Brexit may be finalised has helped to lift sterling.

GBP to USD Rate Might Be Affected, on Risk of Another Hung Parliament

However, the GBP to USD interbank exchange rate could be affected, because even though the world’s investors hope that the UK’s general election will be the Brexit “end game”, there’s no guarantee of this.

Importantly, the financial markets are pricing in almost equal possibilities of a Conservative triumph as a “hung Parliament”, in which no single party gains a majority of MPs.

After all, at the 2017 general election, which former PM Theresa May called because she was well ahead in the polls, the Conservatives ended up losing their majority in Parliament.

This obliged Mrs. May to sign a formal pact with Northern Ireland’s Democratic Unionist Party (DUP), to be able to govern. So the world’s money managers are aware that history could repeat itself here.

Alternatively, it’s possible that Nigel Farage’s insurgent Brexit Party may enjoy an unexpected win at the ballot boxes, in spite of Mr. Farage’s comparatively low polling next to the Conservatives.

This is because PM Johnson has called this general election, even though Brexit isn’t finished yet. So voters may wish to take out their frustration on the PM, by voting for Mr. Farage’s rival party.

Moreover, it’s also conceivable that Labour, the Liberal Democrats and the Scottish nationalists could gain enough seats for a majority between them, according to polling expert Sir John Curtice, on LBC Radio.

In this case, Mr. Corbyn, who’d presumably enter No. 10 Downing Street, may wish to negotiate an alternative Brexit, in which the UK retains closer ties to the EU. A “pro-Remain” coalition might even decide to hold a second referendum.

For example, Morten Lund, an economist with Nordea Markets, writes that: "It appears to be more difficult than ever to predict the outcome of the election.”

“Brexit will be the number one topic and may turn conventional election campaign wisdom upside down. On margin though, Boris Johnson appears to be the favourite, with a clear risk of another hung parliament."

With this in mind, although it’s hoped that December 12th’s election will signal the conclusion to Brexit, there’s no guarantee of this.

In particular, while campaigning goes on, the UK’s political outlook will be up-in-the-air, and subject to changes in the opinion polls. So over the next six weeks, and following the election results, this could affect the pound vs US dollar interbank rate.

Sterling Versus US Dollar May Be Influenced Today by Fed Decision

Turning to the USA, sterling’s value against the US dollar could be affected by key American economic releases today. These include US Gross Domestic Product (GDP) data for Q3 2019, between July and September, in which it’s thought that America’s economy slowed.

These also include the Federal Reserve’s (Fed) latest interest rate decision, where borrowing costs may be cut to 1.5%-1.75%.

According to economists’ predictions, the US economy expanded by just 1.7% over the Summer compared to 12 months ago. If so, this would be below April to June’s economic growth of 2.0%, as well as the second-slowest quarterly growth in almost four years.

In particular it’s thought that the USA’s and China’s trade war is hurting America’s manufacturing sector and exports, while retail sales have also fallen recently.

As a result, today the USA’s central bank, the Federal Reserve, is forecast to reduce interest rates for the third consecutive meeting, by -0.25%. This would make taking out a loan in America cheaper for households and businesses, thereby stimulating US economic growth.

CME Group's FedWatch tool forecasts that there’s a 97% chance that the US Central Bank will cut today, reports Yahoo Finance.

However, while traditionally the US dollar tends to weaken when the Federal Reserve cuts interest rates, it’s possible that today’s reduction in borrowing costs may already be “priced in”.

This is to say that, if the world’s investors assume that the US Central Bank will cut interest rates, this may already be factored into the value of the US dollar. So the buck may be affected differently.

To the contrary, it’s thought that the US dollar may be influenced by the Federal Reserve’s interest rate decision today, if America’s Central Bank signals where borrowing costs could go in future.

For example, the Fed could suggest that it’s “three cuts and done”, like its previous mid-economic cycle reductions in 1995 or 1998. Or the Fed could point to further reductions in future. This may impact the USD.

It’s worth noting that US President Donald Trump continues to push on Twitter for US interest rates to be cut to 0.0%, like in the Eurozone or Japan. According to Mr. Trump, America’s higher interest rates are slowing the country’s economic growth.

However, economic convention is that low interest rates are a sign of weakness, and the USA’s higher interest rates are far healthier. This too may influence the value of the US 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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