The pound US dollar exchange rate initially got off to a strong start last week in the post-Christmas lull. The pound US dollar exchange rate rallied to a two-week high of US$1.3285 on 31st December putting in an impressive end to a strong month of gains. However, the pound wasn’t able to hold those levels selling off across the remained of the previous week and the start of the new year. The pair dropped just shy of 1% in the first days of trading in January, closing last week at US$1.3088.
Let’s take a closer look at the factors which were driving the pound and the US dollar across last week and the events that could drive the currency pair through the coming week.
Pound
Boris Boost
The pound rallied at the start of the previous week as investors cheered a bumper minimum wage increase promised by Boris Johnson. Newly elected Prime Minister Boris Johnson announced that he national living wage will rise by 6.2% in April 2020. This is an increase of over 4 times inflation and is expected to give the average worker an additional £900 per year.
Pound investors cheered the notable bump in pay on optimism that it will lift consumer spending and consequently economic growth and inflation.
Brexit
The pound was unable to hold onto those gains in the second half of the week as Brexit concerns crept back into play. Whilst Parliament approved Boris Johnson’s Brexit Bill on 20th December last year and the UK looks set to leave the EU on 31st January 2020.
However, the focus will now switch to the 1-year long transition period, within which the UK and the EU must agree to a trade deal. Failure to do so will mean the UK leaves the EU at the end of 2020 on World Trade Organisation trade rules. The would be a significant step down from the current arrange. For UK businesses it would be a disorderly cliff edge Brexit, the type of Brexit that economists and the Bank of England have frequently highlighted as the most damaging type of departure from the European Union.
Macro-Economic Data
Both manufacturing and construction pmi data releases missed analysts’ expectations. Both data points showed that the sectors remained in contraction territory at the end of 2019. The pace at which the UK manufacturing sector contracted in December is a cause for concern. Even though these surveys were carried out amidst political uncertainty ahead of the UK general election, neither analysts are investors are expecting any meaningful turnaround in the near future.
The week Ahead
The coming week is relatively quiet on the UK economic calendar. The only potentially high impacting data release is out today, the service sector pmi reading. Analysts are expecting activity in the service sector remained in contraction in December at 49.1. Given the dominance of the service sector in the UK economy, fears will be growing that the UK experienced economic contraction in the final quarter of the year.
Boris Johnson is also due to meet with European Commission President Ursula von der Leyne this week, on Wednesday. Investors will be watching closely for any comments regarding the transition period.
US Dollar
US China Trade
The dollar struggled in the first half of last week. The greenback closed out 2019 on a softer note as the US dollar sell off continued across December thanks to improved risk sentiment in the market on improved US – China trade relations. Trump confirming that the first phase trade deal would be signed by both powers on 15th January saw flows out of the safe haven dollar increase.
The dollar is the reserve currency of the world, therefore in times of increased geopolitical tensions investors often move their money into the US dollar which is considered a safe haven. In times of lower geopolitical tension investors often ditch the greenback for perceived riskier currencies.
US – Iran tensions
The second half of the week saw the US dollar on the rise once more as investors were once again in search of safe haven assets. This time it was not US – China tensions but instead an escalation of tensions in the Middle East.
President Trump order a US airstrike which killed a top Iranian General Qasseum Soleimani in Baghdad. Iran has promised to retaliate and vows revenge. Meanwhile Trump has identified 52 potential targets in Iran. Market investors will be keeping a close eye on how the fare up in the Middle East develops. For now, investors are seeking out the safe haven dollar, a trade which could well continue across the coming week.
Macro-Economic Data
US economic data at the end of the week kept a lid on any safe haven rally in the US dollar. Data showed that the US manufacturing sector, in December, contracted at the fastest pace since the financial crisis in 2009. The closely watch ISM manufacturing index dropped to 47.2, down from 48.1 in November and well below the 49 analysts had pencilled in. The data shows that the slump in the manufacturing sector is not going anywhere fast.
Week Ahead
This week promises to be a busy week for dollar investors. In the first half of the week ahead the service sector report will be released. Investors are not expecting the slump in manufacturing to spill over into the service sector, which remains buoyant. Analysts are forecast a reading of 54.5 in December, where the figure 50 separates expansion from contraction.
The first non-farm payroll release of 2020 could also drive the US dollar. After an impressive 266,000 jobs were created in US in November, analysts are expecting a more down to earth but still solid 168,000 in December. A strong US labour report could boost the buck.
Finally, Iran tensions will be closely monitored. Any hint of a deteriorating situation could lift the dollar as investors seek out its safe haven properties.
