The pound to US dollar interbank exchange rate fell earlier this week, although it’s bounced back as the week went on. This follows the uncertainty surrounding the Bank of England’s next interest rate decision.
The US dollar has held steady whilst the economic news out of America remains largely upbeat. For example, this week US President Donald Trump signed the long-awaited “first phase” trade deal with China, which could accelerate both countries’ economic growth.
US inflation was unchanged in December, which could encourage the Federal Reserve to keep interest rates at their comparatively high 1.5%-1.75%. If so, this could influence the value of the buck in 2020.
This week, President Trump and China’s Vice Premier Liu Hu signed the much-vaunted “first phase” trade pact. Here, Beijing has pledged to buy more US manufactured and farm goods, while Washington has stopped calling China a currency manipulator, amongst other things.
As a result of the trade truce, both countries have already avoided ratcheting up their tariffs on each other even higher. This has held the US dollar steady, because as a result, Chinese imports may fall in price in the USA, cutting costs for American consumers and businesses.
We learnt this week that US inflation remained stable at 2.3% last month, above the Fed’s official 2.0% target. As a result, it looks increasingly unlikely that America’s Central Bank will cut interest rates below their current 1.5%-1.75%, at least for now. In turn, higher interest rates make investing in USD-denominated assets more profitable, which may impact the greenback’s value.
This is especially the case, because at 1.5%-1.75%, America’s interest rates are among the highest in the industrialised world; above the UK, Eurozone and Japan, thereby increasing capital inflows to the United States, and so demand for the US dollar.
Turning to next week, key US economic data includes Friday 24th’s IHS Markit composite Purchasing Managers’ Index for January. This will give us an insight into America’s business performance this month and may influence the value of the US dollar.
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