Pound to US Dollar Pulls Back as Market Bulls Pause

After rallying from 1.25 to a high of 1.3182 in a little over two weeks, the pound to US dollar finally ran into some resistance and drifted lower to end the week just above 1.30. Bank of England Governor Andrew Bailey confirmed on “Super Thursday” that the bank would continue to support the UK economy although Chancellor Rishi Sunak suggested that the government’s furlough scheme could not go on forever. The bank’s comments were generally positive with an upward growth revision for the year, less appetite for zero or negative interest rates, and a feeling that recent economic data signalled a v-shaped recovery.

The UK’s furlough scheme has supported British business by allowing firms to place employees on the scheme with the government covering most of their wages. The idea was to prevent a sharp rise in unemployment and allow businesses to manage throughout this crisis. To date, the scheme has proved successful as the UK’s unemployment level has remained low and some employees have now returned to their work roles as the UK has slowly eased lockdown measures.

However, the Chancellor’s scheme is currently scheduled to end in October, meaning businesses will once again be responsible for the paying the salaries of their employees. As such, it is expected that many businesses will not be able to take back all their employees and UK unemployment figures could rise to a double-digit number within months.

UK Covid-19 infection and death levels remain relatively low with only a small number of local lockdowns enforced since restrictions eased several weeks ago. The UK has also slapped a 2-week quarantine on those returning from countries that have shown a sudden spike in cases, such as Spain, in order to minimise the risk. Whilst the government has seen this as a necessity to mitigate risk, it has caused utter chaos for hundreds of thousands of holidaymakers and the travel sector.

With a pause in Brexit talks after 5 weeks of face-to-face negotiations, there has been few Brexit headlines to move pound to US dollar. Talks will begin again mid-August although it is unlikely we’ll see a breakthrough until the autumn months. A basic zero tariff trade deal for goods with a few add-ons seems the most likely bet and could send pound to US dollar higher in due course but “no-deal” by accident or judgement could send pound to US dollar back down to historic lows.

Uncertain Times Ahead for the US Dollar

Key US data release Non-Farm payrolls showed an increase of 1.76 million on Friday, beating expectations and providing the dollar with some support. The US unemployment rate now sits at 10.2 percent, but it is not clear what ongoing financial support there will be for US workers as the US politicians continue to squabble, although markets remain optimistic that further support will be provided.

US and China trade negotiations look to be moving in the right direction although as we’ve seen time and time before, progress can quickly sour. Markets will pay close attention to US-China trade talks and the US dollar will likely be sensitive to media headlines. With a pending US election this November and Donald Trump currently lagging in the pulls, Trump’s approach could turn more aggressive as he looks to close the gap.

The US election is fast approaching and whilst Joe Biden and the Democrats are ahead of Trump and the Republicans in the polls, there is a long way to go and it would be foolish to write off Trump at this stage. The Democrats underestimated Trump once before so whilst the polls show a palatable lead, there are 3 months to go and we’ve seen how wrong poll forecasts can be, especially in the US where many believe there are a lot of silent Trump supporters. These are people that do not openly support Trump in public but put a cross in Trump’s box on the ballot paper. The US election could have a significant impact on the US dollar as a Democratic government would result in a significant shift in policy as they seek to rip up and undo much of Trump’s work over the last 4 years.

In the short-term, pound to US dollar needs to sustain the break of 1.30 in order to continue its upward trend. If pound to US dollar cannot hold confidently above this level, we could see pound to US dollar quickly return to levels of a few weeks ago, several percent lower.

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