Sterling lost in value versus the US dollar on the interbank market this week, in part because the latest opinion polls, as well as Tuesday’s ITV debate, suggest that a decisive result to December 12th’s UK general election is not yet assured. This raises the risk of a continued Brexit deadlock in future, leading up to the January 31st deadline.
However, turning to America, the US dollar’s value was supported by upbeat minutes of the Federal Reserve’s latest meeting, as well as renewed US/China trade tensions, which have benefited the US dollar as a safe haven. In addition, this week’s US economic data was mostly positive too.
One factor why the pound to US dollar interbank exchange rate weakened this week is the minutes of the Federal Reserve’s latest interest rate decision. These reveal that America’s central bank is unlikely to cut interest rates below their current 1.5-1.75%, unless there’s a “material reassessment of the economic outlook”.
After the last reduction, “the stance of policy would be well calibrated to support the outlook of moderate growth, a strong labour market” and 2% inflation, said the minutes. So the Fed looks set to keep interest rates steady, above the rest of the industrialised world, thereby benefiting the US dollar.
Meanwhile, another explanation why the US dollar has gained this week is because the US Senate has passed a bill, defending human rights in Hong Kong, and warning Chinese officials of sanctions, if Beijing interferes in the city’s independence. China is likely to take this as an intervention in its internal affairs, which may inflame US/China trade relations.
In particular, if the Chinese feel that America has crossed a line, they may decide against signing the “first phase” trade truce later in November. Paradoxically however, this has favoured the US dollar, as the world’s investors often choose the currency as a “safe haven” from geopolitical tensions.
Turning to the US economy, both America’s housing starts and building permits grew more than forecast in October, pointing to continued strength. Later today, IHS Markit releases its composite PMI for November, which could affect the US dollar, if it arrives above or below 51.7, the forecast figure for moderate growth.
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