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US Dollar Vs Pound Near 2-Week High, on Election Uncertainty

Market CommentaryUS Dollar Vs Pound Near 2-Week High, on Election Uncertainty
US Dollar Vs Pound Near 2-Week High, on Election Uncertainty

The US dollar vs pound interbank exchange rate stands at 0.7787 today. This is just -0.11% below the so-called greenback’s strongest against the pound in over two weeks, or since November 12th, reached last November 22nd, at 0.7796.

By comparison, back on November 18th, the US dollar was as weak as 0.7708 versus the pound. So it’s since strengthened by over 0.75 cents, or by 1.02%.

This could benefit you, if you’re a Briton selling property abroad in the United States to repatriate the money to the UK, or a US business owner making international payments to the UK.

This is because, when you exchange US dollars for pounds, you might get a higher sterling total in your UK bank account, compared to if you’d transferred money to the UK in the last two weeks.

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 affecting the value of the mighty buck against sterling recently, go to our USD to GBP Exchange Rate Updates page. Here, simply click on the most recent article.

One reason why the US dollar has risen against the pound on the interbank market is because the financial markets remain cautious about the result of the UK’s election, on December 12th.

Another factor why the USD to GBP interbank exchange rate has risen is because the US/China trade war may soon escalate, which is benefiting the US dollar as a ‘safe haven’ currency.

However, looking to the next two-and-a-half weeks until the UK’s vote, the US dollar vs sterling interbank exchange rate might be affected, as the Conservatives’ lead is rising, say some polls.

US Dollar to Pound Rate Rises, as Markets Cautious Ahead of UK’s Election

As I mention, one reason why the US dollar to pound interbank exchange rate has neared this two-week high today is because the financial markets are cautious about the result of the UK’s general election.

The vote will be held in around two-and-a-half weeks, on Thursday 12th December. It has the potential to affect the UK’s future economic and political direction, including Brexit.

In particular, the world’s money managers feel uncertain about the vote, because at the UK’s last general election in 2017, the governing Conservative Party lost their majority of MPs.

This left former Prime Minister (PM) Theresa May dependent on Northern Ireland’s Democratic Unionist Party (DUP), and frequently caused deadlock in Parliament, with little new legislation approved.

As a result, since the 2017 election, and under both former PM May and incumbent Boris Johnson, the UK’s domestic legislative agenda and Brexit have been in limbo.

In turn, UK businesses and investors don’t know on what terms we’ll trade with the European Union (EU) in future, or what tax policies might be in place. This has discouraged firms from hiring new staff or investing.

Given this, since the UK’s Brexit referendum in June 2016, the UK’s economic growth, measured in GDP (Gross Domestic Product) has been weaker than it arguably might have been, had Brexit been resolved sooner.

For example, just last Friday 22nd we learnt that the UK’s services and manufacturing sectors are shrinking in November, in part because of the ongoing Brexit uncertainty, according to Reuters.

With this in mind, the UK’s general election this month has weakened the pound, because there’s no guarantee which political party will win the vote.

Depending on the result, there might be a stable, majority government led by one party, which could provide predictability to the UK’s outlook. Or there might be a ‘hung’ Parliament, in which the Brexit and political deadlock continues.

Under a so-called ‘hung’ Parliament, a government is formed, yet with a minority of MPs in the House of Commons.

This obliges the government to form pacts with other parties, like PM May did with the DUP in 2017, or the larger opposition can take control of the legislative agenda. Historically speaking, a ‘hung’ Parliament isn’t a recipe for dependable, long-lasting governments.

As a result, the world’s investors are waiting for the results of the December 12th vote. At present, the Conservatives retain a lead according to most polls, although notably, according to The Sunday Times and Sunday Express polls yesterday, their advantage is falling.

This may make the financial markets concerned that the election won’t be decisive, thereby extending the limbo.

For example, Jordan Rochester, a Nomura strategist says that: "It may only take a few polls showing a Labour party bounce or indeed another gaffe moment in UK politics from the Conservatives to put the market’s current base case in doubt."

Also, Viraj Patel, an Arkera strategist, says that: “Recall Theresa May was expected to get a 100+ majority.” So this has weakened the pound.

USD to GBP Rate Gains, as US/China Trade War May Intensify, Over Hong Kong

In addition, another factor why the US dollar vs pound interbank exchange rate has neared this two-week high is because the US/China trade war could soon intensify, over Hong Kong.

Paradoxically given that the United States is one of the main participants in the trade war, this has benefited the US dollar, because during times of geopolitical tension, investors turn to the US as a ‘safe haven’.

The trade conflict between the world’s two largest economies might soon escalate, because last week, the US Senate passed what’s called the Hong Kong Human Rights and Democracy Act.

The bill calls for the protection of human rights and democracy in Hong Kong, in the face of China’s ongoing attempts to bring the autonomous city under closer direct control, and citizens’ protests, reports The Guardian newspaper.

The Senate’s bill may escalate the trade conflict, because Beijing is likely to take the bill as an interference in its internal affairs. In this case, China could be less willing to sign the “first phase” trade truce already being negotiated with America.

If this happens, the US/China trade relations might further deteriorate, and the two economic powers may impose more tariffs on each other.

Importantly, the Senate’s bill looks likely to become law, even if US President Donald Trump doesn’t sign it.

This is because the bill will probably gain the support of 2/3rds of members of America’s legislative chambers, in which case it becomes law regardless of the President’s actions. So the Senate’s actions may well inflame Chinese tensions with the USA regarding trade.

On the other hand, if the Hong Kong bill becomes law, yet Mr. Trump refuses to sign it, the US Commander-In-Chief could conceivably argue that the matter was out of his hands.

Should Mr. Trump wish it, he could then say that he still wants to sign the “first phase” trade deal, regardless of the Senate’s actions. If this happens, this might limit the damage to US/China relations.

However, it’s worth noting that, in the meantime, the possibility that US/China trade relations may worsen has strengthened the US dollar.

This is because, after all, the United States remains the world’s largest, arguably strongest, economy, so is perceived as a “safe haven” from the trade conflict’s effects. So as investors seek refuge in the USA, the US dollar tends to rise in value.

For example, Lee Hardman, an analyst at MUFG, says that "a possible escalation in global trade uncertainties due to US-China tensions re-emerging" has benefited the US dollar.

By contrast, other economies, notably the Eurozone, Germany and also the UK, are exposed to the effects of the trade war. So America’s comparative resilience has lifted the US dollar vs pound interbank exchange rate today.

US Dollar Vs Pound May Be Affected, as ‘Poll-of-Polls’ Shows Tory Lead

Meanwhile, looking to the two-and-a-half weeks until the UK’s general election on December 12th, the US dollar vs pound interbank exchange rate could be affected, because some opinion polls continue to suggest that the Conservative Party will win a majority of MPs.

This would provide the UK stability that many participants on the financial markets want to see, heading into 2020.

For example, according to The Telegraph newspaper’s ‘poll-of-polls’ this weekend, the Tories stand to win a majority of 64 MPs.

Meanwhile, according to analysis firm Datapraxis’ electoral projection model, based on 270,000 YouGov interviews, the Tories will win 349 seats. This compares to Labour’s 213 seats, the Scottish National Party’s 49 seats, and the Liberal Democrats 13.

Importantly, Datapraxis’ model is based on YouGov data. YouGov was the only polling company to predict that former PM May would lose her majority of MPs in 2017. So the financial markets pay special attention to YouGov’s data.

Overall, investors now factor in a 70% chance the Tories will win a majority on December 12th, compared to a 45% probability around a fortnight ago.

Paul Hilder, CEO of Datapraxis, says that: "If this outcome comes to pass, it would be a victory for Johnson and the hard Brexiteer strategems of Dominic Cummings.”

“They would have their mandate to “get Brexit done,” and be liberated to pursue [their UK domestic and Brexit legislative agenda] - perhaps even take the UK out of Europe without a trade deal by the end of next year,” adds Mr. Hilder.

For the world’s money managers, if one party wins next month’s election, this increases the odds that a Brexit deal will pass the House of Commons in the foreseeable future.

Also, there’ll be clarity about the country’s future economic direction, whether that’s greater public investment under Labour, or PM Johnson’s planned tax cuts. This may provide assurance for British businesses.

Notably, both the Conservatives and Labour have now released their campaign manifestos, with significantly different visions for the UK over the next five years. So we’ll see how this affects the opinion polls, and the pound, leading up to December 12th.

At the same time, the rising odds of a Tory government, according to investors, may also influence the US dollar vs pound interbank exchange rate.

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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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