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US Dollar Vs Pound Hits 20-Week High, as May Might Resign

Market CommentaryUS Dollar Vs Pound Hits 20-Week High, as May Might Resign
US Dollar Vs Pound Hits 20-Week High, as May Might Resign
US Dollar Vs Pound.

If you're a Brit living in the USA and thinking of returning to the UK, or a US business owner making international payments to Great Britain, there's potentially helpful news for you today.

The US dollar vs pound interbank exchange rate has reached 0.7921, its highest since January 3rd, or in 20 weeks.

To put this 20-week high exchange rate into context for you, back on January 28th, the US dollar was as weak as 0.7509 versus the pound.

So since then, the USD has gained by value against the GBP by over +4 cents, or by +5.48%.

At today's interbank exchange rate of 0.7921, US$250,000 would be worth £198,025. By contrast, at the interbank exchange rate on January 28th of 0.7509, US$250,000 would have been worth just £187,725.

So as the exchange rate has risen, for the same US dollar total, that's an increase in the sterling amount of +£10,300.

This could benefit you, when you transfer money to the UK from your US bank account. This is because, when you exchange US dollars for pounds, you might now get a higher sterling total, compared to if you'd transferred money more recently.

In turn, this might help you if you're a Brit to return to the UK, or for your imports and exports with UK businesses.

A first reason why the US dollar vs pound interbank exchange rate has reached this 20-week high is because it's been reported that UK Prime Minister Theresa May might announce her resignation tomorrow.

In addition, a second factor why the greenback has gained versus sterling is because the Federal Reserve looks unlikely to cut interest rates in the foreseeable future, say the Fed's latest minutes.

Let's look more closely at these explanations why the US dollar has strengthened in value versus the pound. This might help you to decide when to exchange currencies in the near future.

US Dollar Vs Pound Rises, as PM May Could Resign Tomorrow

A first partial explanation why the US dollar to pound interbank exchange rate has hit this 20-week high is because it's been reported that Prime Minister Theresa May could reveal when she’ll leave her post tomorrow.

In turn, this could heighten the uncertainty over Brexit, including whether the UK leaves the EU with "No Deal", Brexit is cancelled, or there's a second referendum.

Last night, The Times newspaper published that Mrs. May could tell us when she’ll resign her position as soon as tomorrow, Friday 24th May.

It's thought that the Prime Minister could make the announcement, following her scheduled meeting with Graham Brady, the Chairman of the Conservative Party's influential 1922 Committee of backbench MPs.

Mrs. May has been under growing pressure to resign for some time. For example, just last night, the Speaker of the House of Commons, Andrea Leadsom, resigned her post.

Mrs. Leadsom said that she couldn't support the Prime Minister's fourth draft Brexit bill, to be voted on in early June, saying that there are "elements I cannot support, that aren't Brexit", reports The Guardian newspaper.

In addition, earlier this week the 1922 Committee held a secret ballot, about whether to change the Conservative Party's leadership rules, to allow another leadership challenge against Mrs. May.

The 1922 Committee is yet to reveal the results of its ballot. However, they’ve said that they will do so, if Mrs. May hasn't resigned as Prime Minister by June 10th, after her fourth Brexit vote.

Also, this week both the Home Secretary, Sajid Javid, and the Defence Secretary, Penny Mordaunt, asked to see Mrs. May, it's thought to ask about her future tenure.

Given this, The Times is reporting that Mrs. May has succumbed to the pressure, and will announce her departure date this Friday.

However, for the financial markets and British businesses, this will only increase the uncertainty regarding the UK's Brexit outlook.

In particular, if Mrs. May resigns, the Tories will spend weeks electing a new leader and Prime Minister. At the time of writing, former Foreign Secretary Boris Johnson is the frontrunner, who it's thought will pursue a "hard” Brexit at any economic cost to the UK.

In addition, it's also possible that Brexit might be cancelled, or a second referendum announced. So this has contributed to weaken the value of the pound.

USD to GBP Gains, as Fed Unlikely to Cut Interest Rates

In addition, a further factor that has helped lift the value of the US dollar vs the pound is that the US Federal Reserve looks unlikely to cut interest rates below their current 2.25-2.5%, according to the minutes of the Fed's latest meeting, released yesterday.

In turn, this preserves America's interest rates advantage over other major industrialised countries, such as the UK, Eurozone or Japan.

This Wednesday 22nd May, the Fed released the minutes of its latest interest rate meeting, held from Tuesday 30th April to Wednesday 1st May. At this meeting, the United States' central bank kept interest rates steady, as widely forecast.

However, the minutes reveal both that the Fed is unlikely to slash interest rates, and that "a few" Fed members think that borrowing costs should rise, according to the Star Tribune newspaper.

In the Fed's minutes, members spoke little about the possibility of cutting interest rates. This is in spite of the fact that, in recent months, US President Donald Trump has put the Fed under great pressure, to cut borrowing costs, and stimulate economic growth.

For example, Mr. Trump recently called the Fed his "greatest threat", due to what he considers to be high interest rates.

However, the Fed's minutes suggest that the central bank continues to resist Mr. Trump's pressure. To the contrary, according to the minutes, "a few" Fed members think it might be appropriate to lift America's interest rates.

This is to be prevent the USA's prosperous economy and low unemployment from lifting inflation pressures too high, too fast, in the foreseeable future.

What's more, even though America's inflation currently sits below the Fed's 2.0% target, in the minutes, the Fed's members expressed confidence that a return to target "was the most likely outcome".

This contributes to the Federal Reserve's case for not cutting interest rates later in 2019, and also leaves open the possibility of an interest rate hike.

The Fed's minutes have strengthened the US dollar, because America's interest rates are currently the highest among all the major developed economies, such as the UK, the Eurozone and Japan.

In turn, this makes the USA an attractive destination for international money managers to invest, to receive a good rate of return without risking their capital. So this has lifted the USD.

Rising UK Inflation May Affect US Dollar to Pound Rate

Looking ahead meanwhile, a factor that might influence the value of the US dollar to pound interbank exchange rate is the fact that UK inflation rose in April, said government data yesterday.

In turn, this might encourage the UK's central bank, the Bank of England (BoE) to lift interest rates above their current near all-time-low of just 0.75%.

According to the Office for National Statistics (ONS) on Wednesday, UK inflation rose by +2.1% last month. This was below financial markets' forecasts for +2.2%, yet above both March's figure of +1.9%, as well as the Bank of England's 2.0% target.

In particular, UK price pressures increased, due to a 10% increase in Ofgem's energy price cap on gas and electricity.

This data tells us that UK price pressures are rising, even though there's ongoing Brexit uncertainty. In fact, according to many economic measures, the UK economy is doing well.

For example, UK unemployment recently fell to a new 44-year low, while wages continue to rise faster than inflation.

In turn, this might encourage the Bank of England to raise interest rates, to keep a lid on rising price pressures.

For example, Samuel Tombs, an economist at Pantheon Macroeconomics, said following yesterday's inflation data that the BoE "will be less tolerant of a depreciation of sterling than in 2016-17, given higher wage growth".

When the BoE lifts interest rates, global investors make more money from buying British assets. In turn, this lifts demand for sterling, and its value too.

So as rising inflation raises the possibility that the UK's central bank might hike interest rates, this might influence the GBP, looking ahead.

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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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