Sterling falls to 31 month lows against the US Dollar
The pound to US dollar exchange rate continues to test the lower levels with interbank rates for GBP vs USD currently sitting at 1.2180 for the pair. It’s a case of both sterling weakness as a result of Brexit and dollar strength. With no deal preparations in full swing in the UK and under the leadership of the new Prime Minister Boris Johnson, the pound has reacted negatively to the increased likelihood that the UK may leave without a deal. There is also a growing chance that there could be a general election considering Boris Johnson has a majority of just 1 in the House of Commons.
Is a snap UK general election on the cards?
Reports have emerged of a possible snap general election in the UK and history tells us that there can be an additional degree of uncertainty in such times. With the Labour party appearing to talk shop with the Scottish Nationalist Party paving the way to form a coalition if Labour was prepared to offer a second referendum on Scottish independence then there could be a volatile period ahead for GBP to USD.
Brexit remains the biggest driver for Sterling rates
Brexit is the single biggest driver for sterling exchange rates at the moment and any new developments on whether a deal can be reached and whether the contentious backstop can be dropped will likely have a major impact on the price of sterling. JP Morgan believes sterling may fall to 1.15 against the dollar on a no deal Brexit in a conservative case and that it could just as easily fall a further 10%.
Global central banks continue to cut interest rates
The dollar meanwhile maintains its safe haven status after the US Federal Reserve cut interest rates by 0.25% at the July meeting. Although the Fed has cut interest rates reversing its tightening cycle in recent years the dollar has been further supported as other major central banks across the globe have also cut interest rates. The Reserve Bank of New Zealand surprised the markets this week with a sudden drop of 50 basis points which caught the markets off guard. It is relevant as it highlights how uncertain the global outlook is at present and how nervous central banks are. With moves like this it only highlights why the dollar is a safe haven currency and why the US dollar is so strong at present.
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