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US Dollar Vs Pound at 3-Week High, as BoE Surprisingly Downbeat

Market CommentaryUS Dollar Vs Pound at 3-Week High, as BoE Surprisingly Downbeat
US Dollar Vs Pound at 3-Week High, as BoE Surprisingly Downbeat
US Dollar Vs Pound.

The US dollar vs pound interbank exchange rate has hit 0.7810 in the last day. This is its highest in over three weeks, or since October 17th.

By comparison, back on October 21st, the so-called greenback was as weak as 0.7687 versus British sterling, so it’s since risen by over one cent, or by 1.16%.

This may benefit you, because when you transfer money to the UK from the USA, you could get a higher pound total, compared to if you’d exchanged currencies in the last three weeks.

In turn, this could make it more affordable for you, if you’re a Briton selling property abroad in New York or Los Angeles to repatriate the funds to the UK, or to make regular payments.

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

Also, to check what’s influencing the value of the greenback against sterling on the interbank market recently, go to our USD to GBP Exchange Rate Updates page. Here, click the latest article.

One reason why the US dollar has reached this three-week high versus the pound in the last day is because, yesterday, two Bank of England policymakers surprisingly voted to cut UK interest rates.

Another factor why the so-called mighty buck has risen in value against sterling on the interbank market is because the UK central bank yesterday cuts its economic growth and inflation outlook.

However, looking to the next few weeks, the USD to GBP interbank exchange rate could be affected by the UK’s forthcoming general election, and the shifting probabilities about who may win.

US Dollar Vs Pound Hits 3-Week High, as 2 BoE Members Vote to Cut Interest Rates

As I mention, one reason why the US dollar has hit this three-week high versus sterling on the interbank market in the last day is because, yesterday, two members of the Bank of England’s (BoE) nine-member Monetary Policy Committee (MPC) unexpectedly voted to cut UK interest rates.

This raises the odds that the UK central bank could reduce borrowing costs in early 2020.

Yesterday, the Old Lady of Threadneedle Street, as the BoE is also affectionately known, voted to maintain UK interest rates at 0.75%, as widely forecast by financial markets.

However, to the surprise of many global money managers, the decision wasn’t unanimous, as MPC policymakers Michael Saunders and Jonathan Haskel both voted to immediately cut UK interest rates, to 0.5%, reports The Guardian newspaper.

This was the first time that any members of the BoE’s MPC have voted to reduce UK borrowing costs since the central bank last eased monetary policy, in August 2016.

In particular, Mr. Saunders and Mr. Haskel said that they wish to cut UK interest rates, to support the UK’s labour market. Although UK unemployment is at record lows, the number of job vacancies is falling.

What’s more, as well as Mr. Haskel and Mr. Saunders voting to cut interest rates, the BoE’s accompanying statement also suggested that the central bank may ease monetary policy.

"If global growth failed to stabilise or if Brexit uncertainties remained entrenched, monetary policy might need to reinforce the expected recovery in UK GDP growth and inflation”, said the statement.

In addition, the UK central bank now looks likelier to cut interest rates, because other major central banks around the world are reducing borrowing costs lately.

For example, the US Federal Reserve has eased monetary policy three times in 2019, to 1.5%-1.75%, the Reserve Bank of Australia has cut to a record low of 0.75%, while the Eurozone’s central bank is cutting also.

As a result, the BoE may wish to at least suggest that it may soon reduce UK interest rates, to appear in step with its global counterparts.

Otherwise, Governor Mark Carney and his colleagues at the MPC run the risk that UK interest rates remain steady, while rates elsewhere are falling. This may raise demand for the pound, in turn making UK exports more costly, and less competitive.

However, it’s worth noting that, until yesterday’s meeting, the BoE was talking about lifting UK interest rates. According to the central bank’s earlier statements, it forecast that UK’s economic growth would increase, especially if a Brexit deal is finalised.

That said, what with the UK economy showing signs of decelerating recently, the BoE now looks likelier to cut, thus weakening GBP.

USD to GBP Rate Rises, as BoE Cuts UK Growth, Inflation Forecasts

Moreover, another factor why the US dollar vs pound interbank exchange rate has hit this three-week high in the past day is because, as well as looking likelier to cut UK interest rates, the BoE yesterday reduced its UK economic growth and inflation forecasts for 2020 and beyond.

This suggests that UK GDP (Gross Domestic Product) may expand less than previously thought next year.

To be specific, the Old Lady of Threadneedle Street yesterday reduced its 2020 GDP outlook by 0.2%, compared to its August predictions, to 1.6%, according to International Business Times.

In addition, the BoE forecast that UK inflation this year would be 0.2% lower than it predicted three months ago, at 1.6%, while 2020’s UK price pressures would be 0.6% lower, at just 1.5%. So these are quite significant downgrades.

The BoE has cut its UK economic growth and inflation forecasts, because “underlying UK GDP growth has slowed materially this year, and a small margin of excess supply has opened up,” reports the central bank.

“That slowdown reflects weaker global growth, driven by trade protectionism, and the domestic impact of Brexit-related uncertainties,” the BoE said in yesterday’s statement.

This is to say that, given the fact that the UK’s Brexit deadline has now been extended twice, and we’re yet to know what future trade relationship we’ll have with the EU, this has contributed to uncertainty.

In these circumstances, households may be less likely to take out a mortgage, while businesses could delay hiring staff or investing in new equipment. In turn, this slows UK growth.

Meanwhile, external factors include the US/China trade war. Over the last 16 months, the world’s two largest economies have imposed vast tariffs on each other, to vie for economic dominance.

However, this has slowed the global economy, including third-party countries such as Germany or Mexico. In turn, it’s weighed down demand for the UK’s exports, also slowing economic growth.

When the BoE cuts its UK GDP forecasts, this suggest that the size of Britain’s economy may grow less quickly than previously thought.

In turn, this may suggest that there’ll be fewer investment opportunities in the UK in future, compared to if the UK economy grew faster. This tends to reduce demand for the pound among the world’s financial investors, thereby weakening its value.

Greenback Versus Sterling Rate Could Be Affected, by UK Election Uncertainty

Meanwhile, looking to the next few weeks, the US dollar vs pound interbank exchange rate could be affected, by the UK’s election uncertainty.

In particular, the world’s money managers aren’t sure which UK political party will win a majority, or if there’ll be a ‘hung’ Parliament in which no single party wins. In turn, this may affect the outlook for Brexit, and the UK’s domestic agenda.

According to this week’s opinion polls, the Conservatives maintain a lead over the other political parties.

The Tories stand at 38%, 4% down from last Sunday’s Observer/Opinium poll, yet still ahead of Labour’s 26%, the Liberal Democrats’ 16%, and the Brexit Party’s 10%. Traditionally, this lead would be enough to grant the Tories a majority of MPs, in the House of Commons.

For many investors on the financial markets, they want the UK’s political outlook to be as clear as possible.

This is because this reduces the uncertainty over Brexit and the UK’s future economic direction, in turn helping the world’s money managers to estimate their returns on investment. So the financial markets are hoping for a decisive outcome, where a majority government is quickly formed.

However, in spite of this, it’s thought that this could be the most volatile UK general election in recent history, with voters more likely to switch votes.

In addition, the entrance of Nigel Farage’s Brexit Party also complicates the outlook, by adding a fourth main political party to the mix.

In particular, it’s thought that Mr. Farage’s party, which has decided to field candidates in all 600 of the UK’s constituencies, could take votes from the more established parties.

As a result, even though the Conservatives maintain a lead in the polls, the financial markets have cut the odds that the Tories will win an outright majority by 5%, to 45%, compared to the start of this week.

According to Viraj Patel, a strategist with Arkera, "These are scarily muddle-through odds when it comes to UK political outcomes."

So these suggests that investors are aware that there might not be a clear winner on December 13th. In this case, MPs may continue to debate what form of Brexit they prefer, try to call a second referendum, or even extend Brexit beyond January 31st, reports CNBC.

However, that said, it’s worth noting that investors remain broadly confident that there won’t be a ‘No Deal’ Brexit. This is because all the political parties, except Mr. Farage’s Brexit Party, are campaigning on exiting the EU with a deal.

So even though the result of the general election is up-on-the-air, which may affect the value of sterling, the low ‘No Deal’ odds are supporting the pound too.

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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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