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US Dollar Vs Pound Nears 1-Week High, on Trump Trade War

Market CommentaryUS Dollar Vs Pound Nears 1-Week High, on Trump Trade War
US Dollar Vs Pound Nears 1-Week High, on Trump Trade War
US Dollar Vs Pound.

There's potentially helpful news for you today, if you're a Brit in the USA planning to transfer money to the UK, or a US business owner making international payments to Britain, for imports and exports.

The US dollar vs pound interbank exchange rate has risen by over +1 cent, or +1.44%, in the last 6 days. It’s up from 0.7591, to a height of 0.7701 today at the time of writing. This is the US dollar's strongest against sterling in close to a week, or since last Friday May 3rd.

As a result, when you transfer money from the USA to the UK, whether because you're selling a property in America or for your business, you might now get a notably higher sterling total in your UK bank account. This is compared to if you'd exchanged US dollars for pounds earlier this week.

Three contributing factors why the US dollar vs pound interbank exchange rate has neared this 1-week high are, first, because US President Donald Trump has raised tensions in the USA's trade war with China. Second, financial markets remain hopeful that the Federal Reserve might lift US interest rates later this year. Third, in the UK, cross-party Brexit talks look close to collapse.

Let's take a closer look at these reasons why the mighty buck has risen versus sterling so far this week. You might find this helpful, for when you decide to transfer money to the UK from your US bank account, in the foreseeable future.

US President Trump Raises Tensions with China in Trade War

A first partial explanation why the US dollar has neared this 1-week high versus sterling is because America's President, Donald Trump, has escalated his rhetoric over the USA's trade war with China this week, reports financial news source Bloomberg.

Speaking on Wednesday night at a campaign rally at Panama City Beach, Florida, Mr. Trump said that China "broke the deal" over ongoing trade talks between the two countries.

Mr. Trump was referring to Beijing's refusal to commit to law recently-agreed trade provisions between the USA and China. Washington considers this a rejection of these provisions.

As a result, the US Federal Government has announced that it will increase its tariffs on US$200 billion of Chinese imports into the USA, from 10% to 25%, as soon as this Friday 10th May. Beijing meanwhile has promised to retaliate with "necessary countermeasures".

Mr. Trump's rhetoric, and the threat of higher tariffs, comes ahead of fresh trade negotiations between the USA and China. Today, a Chinese trade delegation led by Vice Premier Liu He will travel to the White House, to try and settle the two countries' dispute.

However, unlike at previous meetings, the US President has announced that he'll refuse to meet Mr. He at the Oval Office, unless there's clear progress in trade talks first.

All this has strengthened the US dollar, because Mr. Trump's comments and the possibility of higher tariffs lift the odds that relations between the world's two largest economies might soon deteriorate further.

In turn, this could weigh on global economic growth. However, the US dollar tends to rise in these situations, as the backbone of the world economy, and a safe harbour from economic uncertainty.

Markets Hopeful That Fed Will Hike US Interest Rates in 2019

Also, another contributing factor why the US dollar vs pound interbank exchange rate has neared this 1-week high is because financial markets remain hopeful that the Federal Reserve, America's central bank, will lift US interest rates further later this year.

At the Fed's latest interest rate decision on Wednesday 1st May, the US central bank held borrowing costs at 2.5%, as widely forecast.

The Fed kept interest rates steady, in part because America's inflation remains subdued, at just 1.9% in March 2019. This is even though US GDP growth remains healthy and US unemployment is at historic lows.

However, in Fed Chairman Jerome Powell's statement accompanying the interest rate decision, Mr. Powell said that America's low inflation might be "transitory".

In particular, Mr. Powell said that there were "many little things" depressing price pressures, including for example investment advice services, clothing and footwear, and air transportation.

"I don’t mean to diminish concerns about too-low inflation, but I think there’s good reason to think that these low readings are particularly influenced by some transitory factors," said the Fed Chairman.

With this in mind, financial markets remain hopeful that US inflation could pick up later this year. In turn, this would incentivise the Federal Reserve to hike interest rates above their current 2.5%.

This would encourage global money managers to buy American assets, thus lifting demand for the US dollar to purchase these assets, and the greenback's value too.

Tory/Labour Cross-Party Brexit Talks Close to Collapse

In addition, another reason why the US dollar has risen versus sterling so far this week is because it's been reported that, in the UK, the Conservative and Labour Parties' cross-party Brexit talks are close to collapse.

The UK's two largest political parties have been negotiating to agree a form of Brexit, ever since last month, when the EU extended the UK's Brexit deadline by six months, to October 31st.

Up until yesterday, it was thought that talks were going well. For example, the de facto Deputy Prime Minister, David Lindington, said last Wednesday 1st May that talks were "productive" and "positive".

However, on Wednesday, the BBC's Political Editor, Laura Kuensseberg, reported that Labour said that the Conservatives were being "disingenuous" about entering a Customs Union with the EU.

Moreover, Labour sources told Mrs. Kuensseberg that negotiations had been "tense". Meanwhile, ITV's Political Editor, Robert Peston, reported that talks were close to "being pronounced dead".

A further reason why hope has faded that the Tories and Labour will soon reach a deal is because, on Tuesday 7th May, the government announced that the UK will participate in the European Parliament elections, on Thursday 23rd May. This has led observers to think that the government is pessimistic about agreeing a form of Brexit before this date.

These developments have weakened the pound, because they suggest that the UK will remain in Brexit limbo for the foreseeable future. In turn, this might discourage British businesses from investing in new equipment or hiring staff, until there's clarity about the UK's relationship with Europe. This could slow the UK's economic growth in coming months.

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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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