The dollar looks set for a volatile period ahead after US Fed Chair Jerome Powell indicated this week that the Fed is open to cutting interest rates in the clearest statement from the Fed yet. Having cited trade negotiations and other matters he stated that “We do not know how or when these issues will be resolved” and that the Fed would “act as appropriate” which only highlights how uncertain the US growth outlook is at present.
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The comments follow a previous statement from Fed speaker Bullard who also signalled a rate cut may be warranted soon. The news will be welcome for US President Donald Trump who will seek another term in the 2020 elections. The markets are now expecting two potential interest rate cuts through the rest of 2019. Interest rate cuts could have a negative impact on the dollar as investors move away from what is currently a higher yielding US dollar compared to the other major currencies. However, a boost in the US economy’s fortunes could in fact help lift the dollar even higher especially if the ongoing trade war between the US and China remains unresolved.
The ongoing trade negotiations between the US and China and now Mexico continue to create uncertainty for the US economy but also the global economy. US China tensions run high and in the latest twist the US has said that China is playing a blame game whilst accusing China of backpedalling on trade commitments following a Chinese paper released last weekend that blamed the US for the breakdown in talks. China has also threatened to limit its exports of rare earth metals to the US, crucial for the technology sector. The markets now await the G20 Osaka summit 28-29th June. Any progress on a trade deal being reached should be seen as good for both the US and global economy which will have a direct impact on the strength of the US dollar.
Donald Trump has most recently taken aim at Mexico threatening to raise tariffs on Mexican imports as a result of illegal immigration coming into the US. Trump has imposed a 5% tariff on all Mexican goods heading for the US which will take effect next Monday. The wider implication from all of this is that Trump is expected to announce tariffs on cars made in the EU signalling a potential global trade war across many borders which would impact both the US dollar and relevant currencies.
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