- Double whammy for the Dollar against the Pound
- US-China trade wars coming to an end?
- Brexit outcome keeps us guessing
In a month when major political events have held centre stage in the United States and the UK, Sterling has gained ground against the US Dollar. During February, GBP rose from 1.278 to 1.334 in typical Interbank rates. The low came on the Valentine’s Day Brexit vote in the House of Commons, which the government lost, while the high was on 27th February, following optimism that the UK would avoid a no-deal Brexit. Sterling ended the month around 1.323, a healthy gain from around 1.31 at the start. Looking to March, during which the UK is set to leave the UK and President Trump faces the possible publication of Robert Muller’s Russia report, cable looks set for more ups and downs.
Double whammy for the Dollar against the Pound
Market optimism that Britain will avoid a no-deal Brexit and political fears over US President Donald Trump being damaged by testimony from his former attorney, Michael Cohen, resulted in a double whammy for the Dollar against the Pound in February. Cohen’s colourful allegations in a public session of Congress against President Trump’s business and personal life captured the headlines and led to a small rise in GBP-USD, from 1.324 to 1.333 in typical mid-market rates before slipping back a day later.
The stronger, longer positive momentum for the Pound came from Brexit, which we will discuss later. During the month, the Dollar benefitted from a double whammy of its own, thanks to strong economic results and job creation figures. In Quarter 4, 2018, the United States economy grew 2.6%, preliminary figures suggest and that was in spite of the trade war with China. That means that in 2018 as a whole, the United States economy grew 2.9%, a whisker from the 3% target. That included a large 6.2% annual boost in business investment spending. Commerce Secretary Wilbur Ross says, “President Donald Trump has unleashed American growth at a pace the experts thought was not possible, approaching 3% real GDP growth in 2018. An America First agenda that prioritizes American jobs, American workers, and American industry instead of burdensome regulation and unfair trade deals has revitalized the American economy. America is back.” Earlier, came the news that there were 304,000 new jobs created in January 2019. This was the best result for nearly 20 years and ahead of market expectations. Job openings rose 2.4% in December to 7.3 million – 1 million more than the number of unemployed people at 6.5 million
US-China Trade Wars coming to an end?
It is interesting that the United States has pulled back from increasing tariffs on $200 billion of Chinese goods and products, just as reports emerge that US exports have suffered a lot more than Chinese exports due to the trade wars between the two. At the end of February, the Trump administration announced it would “suspend the scheduled tariff increase until further notice.” The tariffs were due to increase from 10% to 25%, following a truce in the trade war, while the US and China talked. It has not been confirmed how long the stay will last, which suggests the talks are soon to reach a conclusion. That might be just as well from the US point of view, as the despite is likely to cost it the equivalent of around $40 billion a year in lost exports, according to the latest estimates. Economists at the Institute of International Finance and the Bloomberg news group say that from July-November 2018, more than $17 billion was lost in US exports. Counter tariffs by the Chinese led to a collapse in American exports, they say. This is an issue that not only affects the United States and China, but the rest of the world, as it weakens the global economy and affects close trading partners.
Brexit outcome keeps us guessing
With just weeks to go until Britain is due to leave the European Union, no-one knows how the long-running saga will finally work out. During February, the Pound gained ground against major pairings, including the US Dollar on hopes that agreement could be reached with the EU before the 29th March leaving date. Some important issues are on their way to being resolved. The UK government has agreed to seek to safeguard citizens’ rights, whether or not there is a no-deal Brexit. It accepted MP Alberto Costa’s amendment at the end of February that if no deal is reached over Brexit, it will seek an agreement from Brussels to protect the rights of British nationals settled in the EU and EU citizens in the UK.
The amendment “requires the Prime Minister to seek at the earliest opportunity a joint UK-EU commitment to adopt part two of the Withdrawal Agreement on Citizens’ Rights and ensure its implementation prior to the UK’s exiting the European Union, whatever the outcome of negotiations on other aspects of the Withdrawal Agreement.”
As a result, the Pound rose to a six-month high, boosted further by rumours that the European Union could demand an extension for British membership until December 2020. MPs also passed the Cooper/Letwin amendment, saying that if MPs vote to delay Brexit, the government should seek an extension from the European Union and bring forward legislation to change, in law, the date of the UK’s departure. It is not binding in the same way as an Act of Parliament, but is an expression of the will of the House and that would be politically difficult for Prime Minister, Theresa May, to ignore. In any case, the amendment simply formalises the promises made by Mrs May the day before to allow MPs to prevent no-deal and seek an extension to exit day.
After the votes, Reuters asked major banks and financial organisations to assess the risk of a no deal Brexit. The answers ranged from 10% to 53%, illustrating that no-one really knows how Brexit will end. An important date will be on Tuesday, 12th March – the next deadline for the Meaningful Vote by British MPs, should no deal or major changes have been made beforehand. With that in mind, it is important to keep abreast of the news, watch the markets and stay in touch with your Halo Financial Currency Consultant, if you are due to exchange Sterling and US Dollars.
Guidance for USD Buyers
The market has corrected from the recent high above 1.3300 and the next level of support is the psychological 1.3000 and then the Fibonacci level of 1.2980. Further declines towards those levels look likely with the momentum indicators turning negative. Buyers can target 1.32/1.3250 although a break of 1.3000 would suggest a quick move back towards 1.2850.
Guidance for USD Sellers
The market looked to have got a little ahead of itself and the key momentum indicators headed into overbought territory above 1.3300. For now, we are in corrective mode and sellers should target close to 1.3000. Protection can be left above the recent inter-bank high of 1.3350.
Article supplied by Halo Financial, March 2019.
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