The pound US dollar exchange rate advanced 2.6% across 2019, in a roller coaster year for the pair, as investors followed developments in Brexit, rate cuts by the Federal Reserve and the US — China trade dispute.
The pound started the year at US$1.2760 before advancing in the first quarter to a high of US$1.3382. The pair declined across the second and third quarters of the year to strike a nadir of US$1.1958 in August. The pound rebounded off this low versus the dollar, trending higher to a peak of US$1.3515 in December. GBP/USD has given back some of those gains, however still finished the year at US$1.32.
All About Brexit
Brexit has been the principal driver for the pound in 2019. The pound has acted as a fear gauge for a no deal Brexit. The pound initially rallied on hopes of a soft Brexit. However, as Theresa May failed to push her Brexit deal through Parliament on several occasions the pound slumped lower, hitting a nadir when Boris Johnson won the battle to take over as Prime Minister.
Once in power and with the pledge to deliver Brexit the pound found renewed strength rallying 12% across the final part of 2019. The pound struck its highest level since May 2018 following Boris Johnson’s triumph in the general election on 12th December thanks to improved Brexit clarity. The UK Withdrawal Bill has been ratified in Parliament and the UK is due to leave the EU on 31st January with a 12-month transition period where the UK will remain in the single market and customs union.
Boris Johnson has also made it illegal to extend the transition period beyond a year. This means that there is a tight deadline for complex trade talks and puts the possibility of a no deal Brexit back on the table. The UK could crash out of the EU on Word Trade Organisation trade rules at the end of 2020 unless Boris Johnson secures a trade deal. These fears are responsible for the pounds’ latest pull back and are expected to weigh on demand for sterling across the start of 2020 and potentially across the entire year.
Dollar Eases Towards End 2019
President Trump regularly complained about the dollar’s strength in 2019. The dollar remained buoyant despite the Federal Reserve cutting interest rates three times across the year, in “insurance cuts”. Concerns over the health of the US economy peaked over the summer as the US manufacturing sector slumped, as global trade slowed amid the ongoing US — China trade dispute.
The US labour market and consumer sector of the economy remained resilient despite the slowdown in manufacturing. As a result, the Fed indicated an indefinite pause on cuts at its monetary policy meeting on 11th December calming concerns over the health of the US economy. However, the Fed also insisted that a significant and persistent uplift in inflation needed to be seen before the Fed would consider raising interest rates.
The dollar has sold off towards the end of 2019. The recent resolution to the US — China trade war has weighed on the US dollar’s safe haven status. With trade tensions easing between US and China the dollar could come under pressure at the beginning of 2020, particularly should the two powers progress towards a second phase trade deal.
|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 = 1.28934 USD
Here, £1 is equivalent to approximately $1.29. This specifically measures the pound’s worth against the dollar. If the US dollar amount increases in this pairing, it’s positive for the pound.
Or, if you were looking at it the other way around:
1 USD = 0.77786 GBP
In this example, $1 is equivalent to approximately £0.78. This measures the US dollar’s worth versus the British pound. If the sterling number gets larger, it’s good news for the dollar.