For a currency that has recently enjoyed a rise in its base interest rate, it would seem odd that the US Dollar is showing signs of weakness. The below report looks at why this may be happening, and whether the US Dollar’s path to weakness will continue. The below table provides Pound to US Dollar exchange rate changes for the last 30 days.
|Currency Pair||% Change||Difference on £200,000|
US Dollar weakens on interest rate hike
It seems odd to say that despite raising their interest rate the US Dollar weakened but that is just what happened last week. A perceived more ambitious Fed failed to appear and one member even voted against the hike. Typically, a currency rises when an interest rate is raised as it makes it more attractive to hold. However, other truisms on financial markets are that exchange rates often move ahead of events and if expectations are not met the currency can weaken in response. With hikes pencilled loosely in for June and September the US Dollar should still remain strong as versus other leading economies the US is the only one to be so advanced in raising rates. Last year the Fed promised to hike four times but failed to do so citing global fears over the Brexit, China and European economy. With these risks subdued for now the path for further hikes and a stronger US Dollar seem highly likely in the future.
Trump meets Merkel
Angela Merkel met Donald Trump for the first time with some awkward moments. Merkel pledged to increase her investments in NATO but the meeting will probably be best remembered for the lack of ‘the handshake’ Trump has become famous for. Allegedly he didn’t hear her but the media has their own opinions and this frosty relationship could prove damaging down the line.
Whilst Donald Trump is indeed a wild card I am seeing a President more and more frustrated in his ambitions. Yes he is changing events but not perhaps as much as he or his supporters hoped. In the slow moving world of international relations I do not feel his approach will unseat the US Dollar anytime soon.
With Trump seeking to raise GDP (Gross Domestic Product) to 3-4% rising Inflation as a result could see the Fed forced to hike higher than previously thought in the future. Even though Donald Trump’s plans on healthcare and immigration are facing challenges. pending budget plans to implement major cuts in many social and environmental sectors and foster in a low tax environment should see Trump’s pro-business agenda further improve prospects of more rates hikes and in turn a stronger Dollar.
I expect the US Dollar to continue to strengthen with forecasts predicted in a range between 1.06 and 1.30 by year end. This clearly supports an overall view of US Dollar strength against Sterling but there could be surprises on the way, particularly with the triggering of Article 50 just around the corner.
Clients looking to buy the US Dollar with the Pound should I believe be making plans this week to capitalise on the volatility. Speak to one of our experts on 01494 725 353 so they can help you formalise a plan of action.