The pound US dollar exchange rate gained traction across the week. The pair opened the week at US$1.2819 before slipping to a low on Tuesday of US$1.2808. The pound then bounded higher versus the dollar reaching a peak of US$1.2975 on Friday. The pound US dollar rate, also known as “cable” ended the week up 0.9% at US$1.2935.
Let’s take a closer look at what has been moving pound US dollar exchange rate across the week.
The pound started the week on the front foot after the European Union agreed to grant the UK a three-month extension to Brexit. There had been concerns that the group of 27 leaders wouldn’t be able to reach an agreement. French President Emmanuel Macron wanted to give a short extension, whilst the other countries in the European Union wanted to give the UK three months. After a weekend of deliberations on Monday the news of an extension lifted the pound, as it meant that the UK avoided a no deal Brexit on 31st October.
At the start of the week, Boris Johnson called for the House of Commons to vote on a general election. Boris Johnson failed to get the two thirds majority that was required under the Fixed Term Parliamentary Act to hold a general election. Following this result, the pound dropped to its weekly low.
Boris Johnson tried another approach to push for a general election, which only required a simple majority. The House of Commons voted in favour of a General Election, to be held December 12th. News of a general election and more domestic political uncertainty would usually weigh on the value of a currency. Instead the pound rallied.
The pound advanced because Boris Johnson is the favourite t o win a general election. Should he win by a clear majority, he will win a stronger mandate from the electorate to push his Brexit deal through Parliament. This should mean that the UK will be leaving the EU by 31st December with a Brexit deal in place. This would be a good outcome for the UK economy and therefore the pound compared to a no deal Brexit or months or years of uncertainty.
Pound investors are focused on the polls. Any data which shows that Boris Johnson is clearly in the lead and that his support is growing could support the pound.
UK economic data was in short supply across the week leaving investors almost exclusively focused on Brexit and UK political developments. On Friday manufacturing PMI data showed that activity in the manufacturing sector improved in October, although it remained in contraction. The manufacturing PMI increased to 49.8, this was well ahead of the 48.3 that analysts had been forecasting. The level 50 separates contraction from expansion.
Looking ahead pound investors will continue to focus on the polls for the December general election. Any shifts in the polls could create volatility in sterling. Investors will also look ahead to Thursday’s Bank of England monetary policy decision. The central bank is not expected to make any changes to monetary policy just ahead of an election and Brexit. However, with other central banks across the globe easing policy investors will be keen to hear the BoE’s stance. A shift towards the doves could drag on the pound.
The Federal Reserve monetary policy announcement was the key risk event for the dollar in the week. According to the CME Fed watch tool, heading into the announcement, market participants were pricing in a 93% probability of the Fed cutting interest rates. As expected, the Fed cut rates by 25 basis points. This was the third rate cut since July. The Fed gave an upbeat assessment of the US economy. They also signaled that they would now wait for further clarity from economic data before acting again.
However, Federal Reserve Chair Jerome Powell also said that whilst the Fed was not planning any further cuts, policy makers would need to see a very strong rise in inflation in order for interest rates to be hiked again. This was taken as a dovish comment by the Fed and weighed on demand for the dollar
There was plenty of data for dollar investors to digest across the week, overall is painted a mixed picture. Whilst US GDP surprised to the upside, expanding by 1.9% year on year in the third quarter, US PCE inflation slipped lower. The manufacturing PMI was also below expectations.
The most closely watched data release across the month also gave a mixed reading. 128,000 jobs were created in US in October. This was slightly below the 136,000 jobs created in September, still ahead of the 85,000 jobs that analysts had forecast. In addition to a strong headline figure, upward revisions were made to August and September’s job count.
Job creation has slowed compared to last year. However, the numbers are still solid, showing that the US labour market is healthy. This helped calm fears that over the state of the US economy. Quite simply, a strong labour market often equates to a confident consumer who spends well. This is good news for the US economy. Furthermore, the data supported the Fed’s decision to pause on rate cuts.
The non-farm payroll data also showed that average hourly wages increased 0.2% month on month in October, this was below the 0.3% that analysts had forecast. The lacklustre wage growth has fuelled fears that any increase in inflation is still a long way off. Following from Fed Powell’s comments, weak wage growth could mean low inflation for longer and no rate hike on the horizon for a long time. The prospect of low rates for longer is hitting the mood for the greenback and keeping it depressed.
After several high-risk key events in the latter half of this week, next week, in comparison, looks quiet. A few high impacting data points such as durable goods, factory orders and ISM non-manufacturing numbers could attract some attention. US — China trade relations could also take more of a central role, particularly as there is little else to distract US dollar traders.