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US Dollar Vs Pound Near 1-Week High, on Hung Parliament Risk

Market CommentaryUS Dollar Vs Pound Near 1-Week High, on Hung Parliament Risk
US Dollar Vs Pound Near 1-Week High, on Hung Parliament Risk
US Dollar Vs Pound.

The US dollar vs pound interbank exchange rate has hit 0.7765 in the past day, its highest in close to one week, or since October 30th.

By contrast, back on October 31st, the so-called greenback was as weak as 0.7709 versus sterling, so it’s since risen by over 0.5 cents, or by 0.72%.

This may interest you, because when you transfer money to the UK from the United States, you might get a higher pound total, compared to if you’d exchanged currencies in the last week.

In turn, this could make it more profitable for you, if you’re selling property abroad in the USA to repatriate the funds to the UK, or if you’re making regular payments to Great Britain.

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

Also, to check what’s influencing the value of the so-called mighty buck against sterling recently, go to our USD to GBP Exchange Rate Updates page. Here, click on the most recent article.

One reason why the USD has neared this one-week high versus the pound is because many financial investors think that there’ll be a ‘hung’ Parliament, at the UK’s forthcoming general election.

Another factor why the US dollar vs pound interbank exchange rate has strengthened is because it’s thought that the Federal Reserve might be finished cutting interest rates for now.

A third partial explanation why the greenback has gained in value versus sterling is because US Commerce Secretary Wilbur Ross says that the US and China may soon sign their trade truce.

US Dollar Vs Pound Gains, as ‘Hung’ Parliament in UK Election Possible

As I mention, one reason why the US dollar to pound interbank exchange rate has neared this one-week high in the last day is because a number of global money managers think that, in the UK’s forthcoming general election on December 12th, there’ll be what’s called a ‘hung’ Parliament.

This is when no single political party gains a majority of MPs, making it more difficult to govern.

If there’s a hung Parliament after next month’s election, it could further complicate the UK’s political and economic outlook.

After all, MPs might have difficulty deciding whether to pass Prime Minister Boris Johnson’s Brexit deal, and there may be a stalemate. In addition, decisions regarding the UK’s domestic agenda, like transport, health and schools, could be further delayed too.

In general, it’s thought that, if there’s a ‘hung’ Parliament, this is negative for the UK economy. This is because British households and businesses don’t know what taxes or other policies might be in place in the near future.

So rather than take out mortgages, hire new staff, or investment in equipment, UK households and businesses may delay their decisions, slowing the economy.

It’s thought that there could be a ‘hung’ Parliament after December 12th’s election, because the voting public is likelier than ever to switch its votes, reports Reuters.

For example, according to a new survey by ICM, 11% of people who voted for the Conservatives in 2017 will now support the Brexit Party, while 12% of former Labour Party voters now look set to support Jo Swinson’s Liberal Democrats.

This could result in a large swing in the number of MPs that each party wins, even if just a relatively small proportion of the population switches votes.

This is because, under the UK’s First Past The Post system, the candidate with the most votes takes all. There’s no proportional representation, in which the number of MPs assigned would match the percentage of votes that they’ve won.

For example, Samuel Tombs, UK Economist with Pantheon Macroeconomics, has said that the election uncertainty could leave sterling “depressed”.

Mr. Tombs explains that "Our base case remains that the election leads to another hung parliament, with a Tory minority government still paralysed on Brexit and forced into further delays.” So this could affect the value of sterling.

US Dollar Vs Sterling Rises, as Farage’s Brexit Party to Field 600 Candidates

In addition, another factor that’s strengthened the US dollar vs pound interbank exchange rate recently is the fact that, yesterday, Nigel Farage’s Brexit Party announced that it will field 600 candidates in the UK’s forthcoming general election, across the while country, according to The Guardian.

This has weakened the pound, because Mr. Farage’s decision further contributes to the UK’s political uncertainty.

After all, if Mr. Farage’s Brexit Party appears on the ballot slip on all the UK’s constituencies, this gives the British public another political party to vote for.

This could further split support among the more established political parties, such as the Conservatives and Labour. In turn, it may be even more difficult to predict who’ll win a majority of MPs in Parliament, or if no single party will.

For example, Samuel Tombs at Pantheon Macroeconomics has said that: "The Conservatives’ opinion poll lead has grown to 11pp, which usually would be enough for a majority of about 60 seats. But they might bleed support to the Brexit party.”

Also, Kim Mundy, a strategist at CBA, says that: "Brexit Party leader Nigel Farage has said that his party could take votes” from other parties.

According to the latest Observer/Opinium poll this Sunday, the Tories stand at 42%, ahead of Labour’s 26%, the Liberal Democrats’ 18%, and the Brexit Party’s 9%.

So now that Mr. Farage has declared his intention to stand candidates across all the UK, we’ll see in the coming weeks how this affects the opinion polls. In the meantime, the greater uncertainty has weighed on the pound.

USD to GBP Rate Strengthens, as Fed Unlikely to Cut Interest Rates Again Soon

Moreover, another partial explanation why the US dollar vs pound interbank exchange rate has neared this one-week high is because, following the US Federal Reserve’s (Fed) decision to cut interest rates last Wednesday, America’s central bank looks unlikely to reduce borrowing costs again in the near future.

This may help preserve the USA’s relatively-high interest rate advantage.

To explain, last week the Fed cut interest rates for the third time in 2019, by 0.25%, to 1.5%-1.75%.

According to Fed Chairman Jerome Powell, the US central bank did this to protect America’s economy from emerging risks, such as the US/China trade war, Brexit, and slowing global economic growth. So the cuts are a form of insurance, to safeguard America’s economic expansion.

That said, in Mr. Powell’s press conference after the Fed’s decision, he explained that there’d have to be a “material reassessment” of America’s economic outlook to reduce interest rates again, reports CNBC.

This suggests to the financial markets that the Fed won’t cut further for now. This was a “mid-cycle adjustment”, similar to 1995 or 1998, rather than a full-blown policy of lowering borrowing costs.

As a result, the Fed’s interest rates still stand comparatively high compared to the rest of the developed world. After all, UK interest rates are at 0.75%, Eurozone borrowing costs are at 0.0%, while Japan’s stand at minus 0.1%.

With this in mind, it’s still relatively attractive for the world’s investors to buy US-dollar denominated assets, increasing the attractiveness of the US currency.

What’s more, the US central bank looks even likelier to hold interest rates steady now, because last Friday, we learnt that the United States created more jobs than forecast in October.

According to the latest Non-Farm Payroll, the USA created 128,000 new positions last month, above forecasts for 89,000. So this encouraging news has also contributed to lift the value of the greenback.

Greenback Climbs Against Pound, as USA and China Likely to Sign Trade Truce

Furthermore, another reason why the US dollar vs pound interbank exchange rate has neared this one-week high is because it remains likely that the USA and China will sign a “first phase” trade agreement later this month, to begin to bring an end to their trade war.

This has strengthened the US dollar, because if Washington and Beijing end their trade spat, it may support US economic growth.

According to US Commerce Secretary Wilbur Ross last weekend, the world’s two largest economies look set to sign their trade agreement sometime in November, reports Bloomberg.

This is even though the APEC summit in Chile, Santiago, where US President Donald Trump and China’s President Xi Jinping were due to meet, has been cancelled. This is because of the continuing civil unrest in Santiago.

So instead, the USA and China are now rearranging their appointment. According to Ulrich Leuchtmann, at Commerzbank, "A contributing factor [to US dollar strength] is that at least a temporary agreement in the US-Chinese trade conflict seems to be close."

Also, Elias Haddad, a strategist at CBA, says: “the US and China are on track to conclude an initial trade agreement.”

In the past 16 months, Washington and Beijing have imposed tariffs worth hundreds of billions of dollars on each other.

This has slowed each country’s economy, as well as the world’s manufacturing activity, notably in Germany. So if Presidents Trump and Xi were to sign their trade truce, it would bring relief to businesses across the world and the US, thereby lifting 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 Contact Us.

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