The prospect of a UK election sent the pound rallying versus the US dollar. The pound US dollar exchange rate rebounded off the session low of US$1.2808 on news that the opposition party supported the election. The pair jumped to a high of US$1.2908 before easing back to the flat line to close. The pair is moving cautiously higher in early trade on Wednesday.
Usually news of a general election and increased political uncertainty sends a currency lower. The pound however, jumped on the news that the UK will be heading to the polls on 12th December. The opposition party, Labour, claimed they were prepared to back an election now that a no deal Brexit was off the table. As a result, the Prime Minister Boris Johnson won an overwhelming majority in Parliament supporting a general election on 12th December.
The pond rallied on the back of the election news because investors hope that heading to the polls will break the current Brexit impasse in Westminster. Boris Johnson is the favourite in the polls. These elections could provide him with a stronger mandate to push Brexit through Parliament and get the UK out of the EU by the 31st January.
However, if Boris Johnson doesn’t do well and we have a hung Parliament, these elections could also muddy the waters further, potentially opening the doors to further Brexit extensions.
A Hawkish Cut From FOMC?
The US dollar slipped lower in the previous session as investors digested weaker than forecast consumer confidence data. The US economic calendar has been sparse so far this week. However, that will change today. Primarily dollar investors will be looking towards the Federal Reserve monetary policy meeting. Market participants are pricing in a 93% probability of an 0.25% interest rate cut. This will be the third interest rate cut since July.
Investors will be watching carefully for hints as to what the Fed plans to do next. Federal Reserve Chair Jerome Powell faces one of the more difficult communication challenges of his tenure. Should he not get the communication on point, he risks spooking the financial markets. Whilst some investors believe he will leave the door open for further cuts, others believe that the Fed will watch and wait after 3 insurance cuts. With expectations so divergent, the dollar’s reaction could be quite volatile.
|What do these figures mean?|
|When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.
For example, it could be written:
1 GBP = 1.13990 EUR
Here, £1 is equivalent to approximately €1.14. This specifically measures the pound’s worth against the euro. If the euro amount increases in this pairing, it’s positive for the pound.
Or, if you were looking at it the other way around:
1 EUR = 0.87271 GBP
In this example, €1 is equivalent to approximately £0.87. This measures the euro’s worth versus the British pound. If the sterling number gets larger, it’s good news for the euro.