The pound to US dollar exchange rate posted its largest monthly gain in July as the currency pair gained nearly 6 percent, crossed the psychological barrier of 1.30 and reached 1.3165 before falling back and consolidating just below 1.3100. This is the largest monthly gain in 11 years.
The move was caused by a large sell-off in the US dollar as a number of events raised concerns about the US position. Annualized US GDP plunged 32.9 percent in the second quarter and was the worst result in history, although this data was not quite as bad as some analysts had expected. On a non-annualized basis, that's a 9.5 percent drop, which is still catastrophic, but still better than what was released in the euro area this week. The difference is that the euro zone was blocked much faster than the United States. Investors therefore assume that the eurozone has experienced the worst of the crisis, which cannot be said for the USA. In addition, the number of unemployment benefits in the United States increased by almost 900,000 as more and more people want to apply for benefits.
Fed chairman Jerome Powell then took a cautious tone when he warned that recent data indicate a slowdown in the US economy. There was no policy change, but Powell said the Fed will continue its current asset purchase and is ready to do anything to support the US economy. Powell had little detail as he appears to prefer the direction of coming from Congress, where Democrats and Republicans currently have different views on further incentives.
There are now over 150,000 Covid-19 deaths in the U.S., although investor risk has eased as the race for a vaccine intensifies. Oxford University, which works with AstraZeneca, has shown positive early tests, and Moderna has just started phase 3 of its study. This has further weakened the pound to US dollar exchange rate, and the ongoing tensions between the US and China have only made life more difficult for the US dollar.
Will the pound continue to rise in US dollars?
The sudden rise of the pound to the dollar has weakened the dollar, but the UK remains in a fragile position as locks remain and the public and the economy are having difficulty adapting to the new environment. This week, restrictions were placed on 4.3 million people in the north of England as the infection rate with Covid-19 increases. There have been recent economic clippings suggesting that Britain may experience a V-shaped recovery, although it is currently difficult to assess the broader economic picture.
The main event next week will be the Bank of England's “Super Thursday,” with all eyes on the bank's monetary policy report. The bank is expected to keep interest rates at an all-time low of 0.1 percent and not contribute to the £ 745 billion quantitative easing program. However, Andrew Bailey's press conference will focus on the UK economy and what action the bank will take. The question of zero negative interest rates is discussed again when investors look for a direction for the bank's future policy.
The pound in US dollars has suffered from previous comments that the bank is considering the possibility of negative interest rates, although Andrew Bailey has eased it slightly. Investors are looking for further quantitative easing that would facilitate the UK government's borrowing and support the exchange rate of the pound to the US dollar. Any indication of zero or negative exchange rates would likely lower the pound.
After five weeks of intensive negotiations, the UK and the EU have not overcome the deadlock in the Brexit trade talks. There will be no face-to-face talks for a few weeks to give everyone a chance to recover, but the clock is ticking and the pressure for the autumn months is rising without a breakthrough. An immediate breakthrough is unlikely, but significant advances could push a pound towards the US dollar towards 1.40. However, if no agreement is reached, a pound in dollars could be below 1.20. With everything that's going on, this is likely to be the big impact on where the pound will be against the dollar in a few months.
US domestic emissions will continue to affect the currency pair, and a US election in November could certainly affect the exchange rate. At the moment, Joe Biden has an advantage over Donald Trump as the Democrats are trying to regain office as there is still a long way to go and you would be brave to write Trump off right now.
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