The sterling vs US dollar interbank exchange rate rose this week, in part because UK businesses feel more confident in early 2020, according to the latest surveys. In turn, this has given the financial markets confidence that the UK economy might accelerate this year, ahead of today’s crucial PMIs (Purchasing Managers’ Indices), measuring British business activity in January.
Depending on the result of the PMIs, the Bank of England (BoE) may feel more or less inclined to keep interest rates at their current 0.75% when it next convenes on January 30th. Traditionally, higher interest rates tend to support the value of sterling.
However, turning to the United States, the US dollar has weakened this week, for several reasons. For instance, following Washington’s and Beijing’s signing their “first phase” trade pact last week, it’s thought that the global economy might improve.
In turn, this may shift the focus away from the USA’s relative outperformance, and ease demand for the US dollar as a “safe haven” currency, which investors buy as a secure port in stormy global economic and political seas.
In addition, the US dollar has lost out this week, in part because the world’s investors are increasingly concerned that US GDP (Gross Domestic Product) growth might decelerate in 2020. Already, the current expansion is the longest in America’s history, at 127 months, starting in June 2009. So the financial markets think it’s inevitable that the US economy must slow sometime.
In turn, if and when these signs emerge, America’s central bank, the Fed, is being tipped to cut interest rates below their current 1.5%-1.75% , to support growth. Lower interest rates traditionally tend to weaken the buck.
Turning to next week, the Federal Reserve announces its next interest rate decision on Wednesday 29th, while US economic growth figures for Q4, between October and December, go live on Thursday 30th. So we’ll see if the Fed looks set to ease monetary policy in the foreseeable future, and if America’s economy requires greater monetary stimulus, plus their effect on the mighty buck.
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