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US Dollar Vs Pound Hits 34-Year High, as ‘No Deal’ Odds Rise

Market CommentaryUS Dollar Vs Pound Hits 34-Year High, as ‘No Deal’ Odds Rise
US Dollar Vs Pound Hits 34-Year High, as ‘No Deal’ Odds Rise
US Dollar Vs Pound

The US dollar vs pound interbank exchange rate has hit 0.8320 in the past day. This is the mighty buck’s highest versus sterling in over 34 years, or since April 1st 1985.

By contrast, the greenback was as weak as 0.7509 on February 28th this year. So the US dollar has since risen against the pound by over eight cents, or by +10.8%.

This could be of interest to you, if you’re a UK citizen selling property abroad in the United States, or if you’re a US business owner importing British products for your customers.

This is because, when you transfer money to your UK bank account from America, you might now get a higher pound sterling total than any time since the mid-1980s.

In turn, this would make it more profitable for you to transfer the money from the US property sale to the UK, or cut your currency for your business costs to import British products.

To stay updated with the US dollar to pound interbank exchange rate, visit Pure FX’s Rates & Tools page. Here, select ‘USD’ to ‘GBP’ to see the interbank rates for the last week.

Also, to check what’s affecting the value of the greenback against sterling recently, visit Pure FX’s USD to GBP Exchange Rate Updates page. Here, simply click on the latest article.

A first reason why the US dollar vs pound interbank exchange rate has hit this 34-year high is because the markets think that the pound could fall to parity, if there’s a ‘No Deal Brexit.

A second factor why the greenback has reached its strongest against the pound since the mid-1980s is because it’s increasingly difficult for MPs to stop a ‘No Deal’, says a new report.

However, looking forward, the value of the US dollar versus sterling might be limited, if the Federal Reserve cuts interest rates again in September, as some economists forecast.

Let’s look more closely at these reasons why the US dollar vs pound interbank exchange rate has hit 0.8320 recently. This could benefit you, for when you transfer money to the UK.

US Dollar Vs Pound Hits 34-Year High, as ‘No Deal’ Looks Likelier

As I mention, a first reason why the US dollar vs pound interbank exchange rate has hit this 34-year high is because the financial markets think that it’s increasingly likely that the UK will leave the EU by the end of the extended deadline of October 31st, without a deal.

Some economists are now predicting that, if there’s a ‘No Deal’, the US dollar could rise to parity versus the pound.

The UK looks increasingly likely to exit the EU without a deal by Halloween, because new Prime Minister Boris Johnson is preparing in earnest for this outcome.

For example, Mr. Johnson has said that the UK will exit the EU by October 31st “come what may, do or die”, “no ifs, no buts”, and asked the EU to “look into our eyes” to show that we’re serious about leaving the EU.

However, while it could be considered responsible of Mr. Johnson to prepare for the possibility of a ‘No Deal’ Brexit, some investors feel that the Prime Minister is aiming for this.

This is because, for example, Mr. Johnson has refused to reach a deal with the EU, unless they renegotiate the draft Withdrawal Agreement that ex-Premier Theresa May spent three years working on with Brussels.

In particular, Mr. Johnson objects to the planned Northern Irish backstop, in which case, if the UK and EU don’t reach a future trade agreement, then Northern Ireland will remain in the EU’s Customs Union.

This would be to ensure that there’s no hard border on Ireland, and so prevent a return to sectarian divisions, yet would constitutionally separate Northern Ireland from Great Britain.

If the backstop is activated, then to ensure that Northern Ireland and Great Britain remain constitutionally intact, all of the UK would remain in the EU’s Customs Union after Brexit, perhaps indefinitely.

For Mr. Johnson and many hard Brexiteers, this amounts to the EU retaining control over the UK via the backdoor, and would reduce the UK to an EU “vassal state”.

However, European Commission President Jean-Claude Juncker argues that the draft Withdrawal Agreement is “the best and only deal possible”.

This is because the EU’s priority is to ensure that there’s no hard border in Ireland, to respect the terms of the 1998 Good Friday Agreement. So for there to be no hard border after Brexit, Northern Ireland must stay in the EU’s Customs Union.

Since Mr. Johnson became Prime Minister, he’s refused to meet the EU’s leaders, until they agree to alter the Withdrawal Agreement. This is even though the clock is ticking down to October 31st, the UK’s Brexit deadline.

By default, the UK’s legal position is that, if we don’t reach a deal with the EU by Halloween, then we’ll exit without a deal either way. So this possibility is increasing.

In the month since Mr. Johnson entered Number 10 Downing Street, the financial markets have lifted the odds of a ‘No Deal’ Brexit up to 38%. Meanwhile, according to a recent Reuters poll of economists, the probability that the UK will exit the EU without a deal now stands at 30%.

These odds are up from 10% back in February, back when Theresa May was Prime Minister. This has contributed to weaken the value of sterling.

USD to GBP Rate Hits 34-Year High, as Markets Think Dollar Might Rise to Parity

As a result of the rising probability of a ‘No Deal’ Brexit, the world’s money managers are starting to take seriously the possibility that the US dollar vs pound interbank exchange rate could rise to parity in the next few months.

If so, this would be the greenback’s all-time high level versus sterling, and the US dollar to pound interbank exchange rate would have to rise by almost 20 cents.

For example, Rupert Harrison, a fund manager at BlackRock Inc, told Bloomberg recently that: “The pound is at a much lower level now but I still think a no-deal exit would lead to significant volatility and we could be testing parity on a really bad outcome."

According to Bloomberg, most economists think that the GBP will fall to $1.10 versus the USD, if there’s a ‘No Deal’.

Meanwhile, Mike Riddell, Portfolio Manager Allianz Global Investors, has said to Bloomberg: “I thought there was just a 5%-10% chance of a no-deal Brexit by the end of March whereas now I think it is close to 50-50. Markets should be more worried.”

Mr. Riddell adds that he’s “far less confident than I was at the beginning of the year” that the UK and EU will reach an agreement.

One reason why investors are seriously considering the possibility that the US dollar will rise to parity with the pound is because it looks like Britain’s Parliament is having to plan in earnest to prevent Mr. Johnson forcing through a ‘No Deal’.

For example, it’s been reported that MPs could vote down Mr. Johnson’s government in a vote of ‘No Confidence’, to prevent ‘No Deal’.

The latest news about MPs’ plans to prevent the Prime Minister achieving a ‘No Deal’ is that they’ll oblige Mr. Johnson to request another extension to Article 50, the UK’s Brexit deadline.

According to The Times: "MPs are drawing up plans to compel Boris Johnson to break his “do or die” pledge and force him to request an 11th-hour Brexit extension from the European Union."

In this case, MPs would call a vote of ‘No Confidence’ in Mr. Johnson’s government. However, whereas it’s political convention that the opposition parties then spend 14 days trying to create an alternative government, according to this plan, MPs would use the time to pass legislation.

This legislation would force the Prime Minister to request another Article 50 extension, so that the UK would stay in the EU after October 31st, so that there’s time to hold a general election.

The Guardian newpaper reports that the plan has been approved by the opposition Labour Party’s leaders, former Attorney General Dominic Grieve, plus 300 MPs opposed to a ‘No Deal’ Brexit.

This is arguably the House of Commons’ most serious plan yet to prevent the Prime Minister achieving a ‘No Deal’ Brexit. We’ll see if the plan is workable when Parliament reconvenes in early September.

That said, it’s worth mentioning that the odds appear to be against MPs. This because, according to a new report by the Institute for Government this weekend, Parliament’s options to prevent a ‘No Deal’ Brexit are running out, according to The Telegraph newspaper.

According to the report, "The government could ignore MPs’ opposition to no deal. Simply voting against it in principle would not require the government to act.” So this might affect the value of sterling.

US Dollar Against Sterling Might Be Affected, if Fed Cuts Interest Rates Further

Meanwhile, looking forward, the US dollar vs pound interbank exchange rate might also be influenced, if the US Federal Reserve cuts interest rates further in September, as some predict.

This would follow the Fed’s decision to cut borrowing costs by -0.25% a fortnight ago, to 2.00%-2.25%, and would suggest that America’s economy needs further monetary support to prosper.

America’s central bank could reduce borrowing costs again next month, in particular because the USA’s and China’s trade war has intensified, reports The Wall Street Journal.

Last week, the USA imposed tariffs on another $300 billion of Chinese imports, which makes it more expensive for American shoppers to buy these goods. In retaliation, Beijing allowed its currency, the yuan renmimbi, to weaken below 7.00 for the first time in a decade.

The Fed could cut interest rates given the trade war, because if China’s products rise in price, Americans will have to spend more to buy them.

This could slow America’s economy, prompting the central bank to cut interest rates. This would make it cheaper for US citizens to take out loans, repay their mortgages, or pay off credit card debt. This helps alleviate the impact of the tariffs.

For example, Marios Hadryiacos, an investment analyst at broker XM.com, said recently that: “We have seen bets on lower interest rates in September soar. A -0.25% cut is fully priced in. Very similar to the July meeting we also have some expectations for a -0.5% more aggressive rate cut.”

So it looks increasingly likely that the Fed will cut again next month.

This could affect the value of the US dollar, because when the Fed reduces interest rates, this makes investing in US assets less profitable. This encourages investors to buy other currencies, in search of higher returns.

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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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