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US Dollar Vs Pound at 1-Week High, as UK GDP Falls in April

Market CommentaryUS Dollar Vs Pound at 1-Week High, as UK GDP Falls in April
US Dollar Vs Pound at 1-Week High, as UK GDP Falls in April
US Dollar Vs Pound.

The US dollar vs pound interbank exchange rate has reached 0.7905 today. This is its highest in one week, or since June 4th.

This may interest you, if you're a British citizen living in the USA, and you're planning to sell property abroad and transfer money to the UK.

This could also be helpful for you, if you're a US business owner, and you're making international payments to import British goods.

This is because you might now get a higher pound total, compared to if you'd transferred money in the past week.

In turn, this could lift your sterling total in your UK bank account when you sell your US property, or cut your business costs.

A first reason why the US dollar vs pound interbank exchange rate has hit this 1-week high is because the UK's economy shrank further than forecast in April.

Also, a second factor why the greenback has risen against sterling is because financial markets are increasingly worried that Boris Johnson might become the next UK Prime Minister.

Lastly, another partial explanation why the mighty buck has climbed versus the pound is because the USA and Mexico have reached a deal to avoid putting tariffs on each other.

Let's look more closely at these factors why the US dollar vs pound interbank exchange rate has hit this 1-week high. You might find this helpful, for when you transfer money to the UK.

US Dollar to Pound Rises, as UK GDP Shrinks in April

A first reason why the US dollar to pound interbank exchange rate has reached this 1-week high is because the UK economy shrank faster than forecast in April, said official statistics on Monday.

In turn, this has raised concerns among financial markets that the Brexit uncertainty might be affecting the UK's economic growth outlook more than previously thought.

According to the UK's Office for National Statistics (ONS) on Monday 10th June, the UK economy shrank by -0.4% in April, compared to the month before.

This is below economists' predictions for a -0.1% fall in economic growth. Also, it's beneath March's -0.1% decline in output too.

The UK's GDP (Gross Domestic Product) fell in April, chiefly because of a sharp decline in automobile production. Vehicle output fell by -45% in the first month of Q2 compared to a year ago.

To be specific, UK car plants produced just 70,971 cars, -56,999 fewer than in April 2018. This is because factories stopped production, due to the risk of a 'hard' Brexit.

"Uncertainty ahead of the UK’s original EU departure date led to planned shutdowns" in vehicle production, said Rob Kent-Smith, Head of GDP at the ONS about this data.

What's more, Mr. Kent-Smith added that there was "widespread weakness across manufacturing in April." In all, UK manufacturing shrank by -3.9% in April, well beyond economists' forecasts for -1.1%.

This steeper-than-expected fall in UK GDP has weakened the pound, first because it suggests that the uncertainty over a 'No Deal' Brexit is weighing on economic growth more than previously thought.

In turn, if British business owners remain concerned over Brexit, they may invest less in new equipment or hire fewer staff. So this has weighed on sterling.

Also, the British pound has weakened following these downbeat UK economic growth figures, because they make it less likely that the Bank of England will lift interest rates, above 0.75%.

This is because, when the UK economy slows, the central bank keeps interest rates low, to encourage borrowing. However, this makes investing in UK assets less profitable, which weighs on the GBP.

USD to GBP Climbs, as Boris Likelier to Become Prime Minister

In addition, there’s another factor why the US dollar vs pound interbank exchange rate has reached this 1-week high.

This is that financial markets are concerned that it now looks likelier that Conservative Party leadership candidate Boris Johnson will become the UK's next Prime Minister. It's thought that Mr. Johnson favours a 'hard' Brexit, or even a 'No Deal' exit from the EU.

According to the markets, there's now a 1/2 chance that Mr. Johnson will replace Theresa May as UK Prime Minister, as soon as July. Mr. Johnson enjoys significantly better odds to become Prime Minister than his rivals in the Conservatives' leadership contest.

These include Environment Secretary Michael Gove, Foreign Secretary Jeremy Hunt, and ex-Brexit Secretary Dominic Raab.

The financial markets are concerned by the possibility that Mr. Johnson will become the next Prime Minister, because since he announced his candidacy, Mr. Johnson has escalated his rhetoric with the EU.

For example, in Mr. Johnson's video revealing his leadership intentions, he said that the UK will exit the EU by the end of the extended deadline of October 31st "with or without a deal".

In addition, this weekend Mr. Johnson told The Sunday Times newspaper that, if he becomes Prime Minister, the UK might not pay its £39 billion Brexit bill.

Mr. Johnson said that: “I always thought it was extraordinary that we should agree to write that entire cheque before having a final deal. In getting a good deal, money is a great solvent and a great lubricant."

Mr. Johnson's remarks have raised heckles in Brussels. In particular, this is because the UK previously agreed to pay the £39 billion, as part of Theresa May's three-year talks with the EU.

According to a source close to French President Emmanuel Macron: "Not honouring your payment obligations is a failure of international commitments equivalent to a sovereign debt default,” reports financial news source Reuters.

Given this, the pound has weakened, as Boris Johnson looks likelier to become the UK's next Prime Minister. In turn, this lifts the odds of a 'hard' Brexit' or a 'No Deal' exit from the EU.

US Dollar Exchange Rate Rises, as USA and Mexico Avoid Tariffs

What's more, a further partial explanation why the US dollar vs pound interbank exchange rate has hit this 1-week high is because, yesterday, the USA and Mexico avoided putting tariffs on each other.

In turn, it's thought that this will strengthen both the USA and Mexico's economic growth, and reduce tensions over the global trade outlook.

In May, US President Donald Trump had threatened to impose a 5% tariff on all Mexican imports to the USA. This is if Mexico refused to tighten its border security, to prevent illegal immigrants entering America.

On Monday 10th June, Mexico capitulated, and said that it would tighten its border security. In turn, Mr. Trump announced that the tariffs were cancelled, according to CNBC.

As a result of the USA and Mexico's truce, imports and exports between the two North American countries won't face new costs. This could strengthen their GDP growth.

In addition, Mr. Trump's decision avoids opening a new front in America's trade war, with other countries including China, Japan, and Europe. So this welcome news has boosted the value of the USD.

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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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