The pound dived 2.4% versus the US dollar across the previous week. The pound US dollar exchange rate started the week at US$1.3331 before edging higher to US$1.3424, just 90 points short of the 18-month high of US$1.33515 from the previous week. However, the pound was unable to hold the gains and quickly fell southwards, shedding 1.5% on Monday, extending losses across the week to close at US$1.3004.
Let’s take a look at the factors that were driving both the pound and the US dollar across the past week and what this week could have in store for the pair.
British Pound
No Deal Brexit Back On The Table
The pound started the previous week on the front foot supported by optimism following the Conservative’s resounding win in the UK general election. Investors cheered the 80-seat majority won by Boris Johnson, which was tied to Boris Johnson’s Withdrawal bill being quickly pushed through Parliament and the UK leaving the EU with a deal in place on 31st January, to begin the 1-year transition period. Parliament voted the Withdrawal Bill through with a firm majority of 358 to 234 votes.
Clarity surrounding Brexit was short lived. As attention shifted towards the transition period uncertainty started to weigh on the pound. Early last week, Boris Johnson confirmed that the UK would leave the EU in January. However, he also confirmed that he would not be requesting an extension to the transition period. This means that the UK will leave the EU with or without a trade deal in place at the end of December 2020.
The idea of leaving the EU without a trade deal in place caught investors off guard. This move by Boris Johnson has brought a no deal Brexit back to the table. Leaving the EU without a trade would mean the cliff edge Brexit, which economists have frequently cited as the worst possible outcome for UK businesses, the British economy and therefore the pound is once again a very real possibility. The lingering uncertainty that dragged on the UK economy across 2019 could continue to drag on the UK economy across 2020. As a result, the pound dropped sharply lower, giving back post-election gains.
Macro-Economic Data
PMI data at the beginning of the week showed that both the UK manufacturing sector and the dominant service sector both unexpectedly slipped deeper into contraction fuelling fears that the UK economy would contract again in the fourth quarter. The gloomy figures added pressure to the pound at the beginning of last week.
Inflation data offered a little more support, remaining steady at 1.5%, when analysts had expected consumer prices to dip lower to 1.4%. The UK unemployment level also dropped to 3.8%, the lowest level since 1975; a sign that the UK labour market remains resilient.
Bank of England
The Bank of England (BoE), as expected kept monetary policy unchanged with interest rates at 0.75%. Two policy makers voted to cut interest rates by 0.25%, as they did in November as well. However, the UK central bank was more upbeat over the outlook for the global economy than market participants had been expecting, leading to a slightly more hawkish tone from the BoE. This helped underpin the pound towards the end of the previous week.
Week Ahead
The coming week is a short trading week owing to the Christmas break. There is little in the way of high impacting UK data for investors to towards. Instead Brexit developments will remain under the spotlight. Further signs of the UK moving towards a no trade deal Brexit could send the pound lower.
US Dollar
US — China Trade
The mood towards the US dollar fluctuated across the previous week despite a US — China phase one trade deal having been announced earlier in the month. The lack of details surrounding the trade agreement between the two powers unnerved investors. However, comments by US Treasury Secretary, that he is confident that China and the US will sign the deal in January helped ease concerns, weakening demand for the safe haven dollar.
As the new week kicks off, China has said that it will cut import tariffs on goods including pork, paper products and some high-tech components as from 1st January, according to the Finance Ministry. The news has had a limited impact on the US dollar as trading kicks of for the new week, however as trade tension dispel the dollar could come under further pressure as investors sell out of the safe haven currency and look towards riskier trade currencies such as the Australian dollar.
Macro -Economic Data
Solid US economic data releases at the end of the previous week ensured a strong finish for the US dollar. US GDP printed as analysts expected in the third quarter at 2.1% growth. However, an uplift in personal consumption, above expectation, was a positive sign. US consumer confidence also surprised to the upside, showing that household sentiment remained upbeat and was improving heading towards the end of the year. Finally, PCE inflation, the Federal Reserve’s preferred measure of inflation beat forecasts at 1.6%. Overall the solid data fuelled expectations that the Federal Reserve would nor continue cutting interest rates in the coming year, lifting the dollar.
Trump’s Impeachment
President Trump being impeached last week was a historic moment. He was the third US President in history to have been impeached. However, the greenback barely acknowledged the event. This was because Trump will almost certainly be acquitted by the Republican led Senate. As a result, the chances of Trump being ousted are very small.
Week Ahead
Trade developments will be under the spotlight as investors digest the latest headlines and await a date for the two sides to sign the deal. There are also a couple of influential economic data releases which investors will be watching. These include Monday’s US housing starts and Tuesday’s durable goods orders data, which will be the most closely watched of the macro releases this week.