The US dollar vs pound interbank exchange rate stands at 0.7592 today at the time of writing. This is its highest in five days, or since December 12th.
By comparison, following the UK election result last week, the greenback was as weak as 0.7402 against the pound. So it’s since risen by close to 2 cents, or by 2.56%.
This is because, when you transfer money to the UK from the USA, you could get a higher pound total, compared to if you’d exchanged currencies in the last five days.
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 greenback against sterling on the interbank market recently, go to our USD to GBP Exchange Rate Updates page. Here, click the latest article.
One reason why the US dollar to pound interbank exchange rate has risen is because it’s reported that Prime Minister Boris Johnson will prohibit extending the Brexit transition beyond 2020.
Another factor why the USD has gained in value against the GBP is because the UK’s economic activity slowed further in December, according to respected watchdog IHS Markit yesterday.
However, looking to next year, the US dollar vs pound interbank exchange rate could be affected, if the UK’s business activity beats forecasts, and if the new British government increases public spending.
USD to GBP Strengthens, as Boris to Outlaw Brexit Transition Extension
As I mention, one reason why the US dollar vs pound interbank exchange rate has reached this five-day high today is because it’s reported that UK Prime Minister (PM) Boris Johnson intends to legally prohibit extending the UK’s Brexit transition period beyond the end of next year, December 31st 2020.
This has raised the possibility of another “cliff-edge” Brexit deadline in 12 months.
In particular, it’s thought that PM Johnson will use his new 80-seat majority in the House of Commons, following last week’s UK election, to “legally prohibit the government agreeing to any extension,” according to an anonymous senior government source overnight.
This would tie the government’s hands from extending the transition period, or the future UK/EU trade talks, into 2021.
Reportedly, PM Johnson’s plan is to force the EU to negotiate the future trade deal rapidly, to reach an agreement in the next 12 months, rather than the six or seven years that such trade deals typically take.
However, for the financial markets, the PM’s intentions risk the possibility of a Brexit “cliff edge”, in which the UK doesn’t finalise a new trade agreement by the end of next year.
In this case, the UK would revert to trading with the EU on World Trade Organisation (WTO) terms. These would include higher tariffs and more bureaucracy than if London were to finalise an agreement with Brussels.
In turn, this might make exporting and importing with the continent more costly, which could slow the UK’s GDP (Gross Domestic Product) growth in 2020 and beyond.
For example, Elsa Lignos at RBC says that "The British pound [GBP] took a hit and is under pressure again in early London trading on news that the government plans to create a Dec 2020 cliff-edge."
“In practice it would erode all the positives of a large Tory majority and bring us back to previous position of GBP uncertainty rising rather than falling next year,” adds Mrs. Lignos. So this has weakened the pound.
US Dollar Vs Pound Gains, as UK Business Activity Falls in December
In addition, another reason why the USD to GBP interbank exchange rate has hit this five-day high is because the UK’s business activity fell further in December, said trusted statistics yesterday.
This raises the possibility that UK GDP could contract in Q4, between October and December, as well as raises the prospect that the UK economy may grow less than the 1.3% forecast for 2019.
According to respected watchdog IHS Markit on Monday, the UK’s “flash” PMIs (Purchasing Managers’ Indices) for services and manufacturing in December arrived at 49.0 and 47.4 respectively.
For UK services, this was below economists’ forecasts for 49.5, as well as November’s figure of 49.3. Meanwhile, for UK manufacturing, this was below predictions for 49.3, and last month’s 48.9.
Importantly, both UK services and manufacturing PMIs for this month are below the 50.0 figure that signals expanding economic activity. So this tells us that the two largest sectors of Britain’s economy fell further this month, following November’s decline.
Overall, IHS Markit’s composite PMI for the UK in December was at 48.5, a 41-month low, signalling weaker economic growth.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, says that this “shows that businesses were on tenterhooks ahead of the election, with uncertainty about its outcome and Brexit dampening activity."
Also, Thomas Pugh at Capital Economics says that “if there isn’t a pick up in the surveys early next year then the [Bank of England] may decide to help out by cutting interest rates."
This is to say that UK business activity eased again this month, both because of the UK’s general election uncertainty, and Brexit.
It’s thought that, if this decline continues next year, the Bank of England (BoE) may be increasingly likely to cut UK interest rates, below their current 0.75%. In general, lower interest rates tend to weaken a currency, so this possibility has dragged down sterling.
Greenback Versus Sterling May Be Affected, by Brexit Ratification, UK Public Spending
However, looking to next year, the USD to GBP interbank exchange rate could be influenced, if and when the UK’s Brexit deal is ratified, and by the high probability that the UK government will increase public spending next year, thereby supporting the economy.
In addition, it’s worth noting that IHS Markit’s PMIs, which reported falling UK activity in December, often understate economic growth.
To begin with, although IHS Markit’s UK services and manufacturing PMIs signal shrinking business activity in December, Samuel Tombs at Pantheon Macroeconomics says that:
"On past form, the composite PMI is consistent with a 0.2% quarter-on-quarter decline in GDP Q4. The PMIs, however, have tended to overplay the impact of political uncertainty on GDP.”
So this raises the prospect that, even if IHS Markit’s PMIs signal minus 0.2% UK economic growth in Q4, Britain’s economy might in fact stagnate at 0.0%, thereby avoiding a contraction.
As a result, it’s useful to take IHS Markit’s PMIs with a pinch of salt, as they frequently underestimate the UK’s performance. So if the UK’s GDP expands above forecasts in late 2019, this could affect the value of the pound.
Elsewhere, the US dollar vs pound interbank exchange rate might be influenced, if and when PM Johnson ratifies the UK’s Brexit deal.
In particular, following the PM’s win at the UK election last week, in which the Conservatives unexpectedly won an 80-seat majority, it’s thought that PM Johnson will introduce the UK’s deal in Parliament, for MPs to at long last pass as soon as on Friday.
This will put an end to three-and-a-half years of uncertainty, in which we’ve seen three Prime Ministers, two elections, and frequent Parliamentary deadlock. So the relief at passing a Brexit deal could give confidence to British firms, thereby boosting the pound.
Moreover, the new Conservative government has promised to put an end to austerity too, by significantly lifting public spending in the next five years.
For example, PM Johnson has promised to spend £80 billion in the North of England, where the Tories won new constituencies last week, as well as invest in new hospitals, upgrade schools, and improve the UK’s rail network.
This increased public spending could lift the UK’s economic growth in 2020, as well as give renewed optimism to British businesses to hire and invest.
With this in mind, Thomas Pugh at Capital Economics says that “A Brexit deal and a potential fiscal loosening could give the [UK economy] a boost early in the new year." If this proves accurate, this could affect sterling in 2020.
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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.