U.S. Dollar Strengthens While Pound Slumps

Alan Penny

30 July 2019

3 min read

US Dollar Growth

Tuesday saw the U.S. dollar strengthen versus other major currencies as the markets waited for the Fed decision regarding rates. The pound sterling, on the other hand, kept falling as concerns over the potential chaos of a no-deal Brexit grew.

Thus, the U.S. dollar index was 97.877, equating to an increase of 0.1%.

The Federal Reserve will be meeting to discuss monetary policy starting on Tuesday for two days. On Wednesday, analysts expect the Fed to announce a rate decrease of at least 25 basis points.

While there was a lot of support for the idea that the Fed’s rate cut would be 50 basis points, it is believed far less likely now thanks to positive data, including good U.S. GDP figures.

The USD was further strengthened by a significant increase in June’s pending home sales, along with positive consumer confidence figures in July.

The U.S. dollar gained ground versus the Japanese yen, with the USD/JPY trading at 108.58, showing a decline of 0.2%. The JPY weakened on the back of the Bank of Japan’s decision to maintain the interest rate at current levels, but revision their inflation predictions downwards.

Pound Slumps as Markets Fear a No-Deal Brexit Will Cause Global Chaos

The pound hit its lowest level since March 2017, trading at $1.2120. Since Boris Johnson took over as Prime Minister, the pound has declined by $0.036.

Johnson has repeatedly stated that he was willing to go through with a no-deal Brexit, and markets now fear the chaos that would result from this move.

The pound has been a slave to any news surrounding the Brexit since the EU referendum was held in 2016. The pound had its most significant decline in one day since the early 1970s after the result of the referendum was publicized.

ING issued a note to their clients warning them that the pound would likely experience even more weakness in the near future. The bank’s analysts feel that the pound will continue to decline, mainly due to the uncertainty surrounding Brexit, but also the increasing likelihood that early elections will take place.

Boris Johnson has stated that he will negotiate a new deal with the EU and plans to boost the U.K.’s economy after what he dubbed the “gloom” of Theresa May’s stint as PM.

Despite Johnson’s veiled threats towards the EU that he was willing to remove the U.K. from the union without a deal, the European Union has stated they are unwilling to change the terms already negotiated with Theresa May.

In an attempt to garner further support, Johnson as embarked on a tour of the country. Thus, on Monday, while in Scotland, he told the press that he wanted to negotiate a new deal, but, at the same time, preparations must be made for a no-deal Brexit.

What concerns investors is the potential shockwave that could affect the global economy if the U.K. left the EU without a deal. It could also potentially push the British economy into a recession, cause upheaval in the financial markets, and London’s position as the most important international financial hub would weaken.

However, those in favor of Brexit believe that the short-term difficulties would be outweighed by the long-term benefits. Furthermore, they feel that the potential problems resulting from a no-deal Brexit have been greatly exaggerated.

Tuesday saw Boris Johnson attempt to draw British farmers to his side by promising they would receive better conditions and deals once the U.K. was out of the European Union. He stated that he fully backed British farmers and wanted to ensure that the Brexit would be beneficial for them.

One serious problem in any potential negotiations between the U.K. and the EU is the Irish backstop, which is meant to prevent the installation of a hard border between the Republic of Ireland and Northern Ireland.

Johnson is adamant that the backstop is removed, or he won’t return to the negotiating table. The EU, on the other hand, refuses to back down. Thus, a no-deal Brexit is becoming increasingly likely, and the pound will continue to suffer as a result.

Written By
Alan Penny

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