- Mixed mid-term election results
- Trade war provokes shift in China economic policy
- PM May ‘confident of Brexit deal’
Since a dip following the UK Budget “to end austerity” at the end of October, when GBPUSD reached a monthly low of 1.27077 in typical mid-market rates, Sterling has gained steadily against the US Dollar to around 1.315 at the mid-term elections. An acceptable Brexit deal could see the Pound rise even further against the Dollar, as long as the terms are favourable. It will also be interesting to see how the Dollar settles down after the mid-term election results, which brought a mixed result and saw no major movement between the Pound and Dollar.
Mixed mid-term election results
There was something to cheer both parties in the US mid-term elections, with Republicans holding onto the Senate with an increased majority and Democrats retaking the House. The USD immediately fell a little against the Pound, although the speculation over a Brexit agreement being close was also affecting the value of the pairing. However, in the longer term, it is likely that the split in control of Congress will make it trickier to get approval for major tax or spending measures and may weaken the Dollar in the months ahead. This could mean that President Trump directs more of his attention to the trade war with China and the lowering of the bilateral deficit. Any major escalation here is set to not only affect the value of the Pound versus the Dollar, but many of the international basket of currencies. Political uncertainty, struggle and deadlock is likely to be the hallmark of the next two years in Congress and it remains to be seen how the Dollar will settle down. On the flipside, positive US economic data does tend to boost the US Dollar, so there is plenty of scope for a correction.
Trade war provokes shift in China economic policy
So, what has happened in the last month with the US/China trade war? The biggest news has been a shift in policy in China, as the trade tariffs have started to have an effect on its economy. Chinese Gross Domestic Product grew at 6.5% in the year to Quarter 3, 2018, its slowest rate since the global financial crisis. Manufacturing is coming close to contracting – and is likely to do so when November’s figures are released, analysts believe.
In October 2018, China’s Purchasing Managers’ Index (PMI) was at 50.2 – with a level under 50 indicating contraction – down from 50.8 the previous month. As well as the effects of the trade war, domestic demand in China has softened following a crackdown on debt and risky lending, which has increased the cost of borrowing for Chinese companies. However, the Politburo has now had a change of heart. It has previously focused on controlling financial risk by lowering debt, alleviating poverty and combatting pollution. Yet in early November, China announced it was now looking to increase market reforms due to the threat from the United States trade war. To date, the US has imposed tariffs worth $250 billion on Chinese goods and has threatened to add another $267 billion. China, which is more limited in its actions, had imposed $110 billion tariffs on United States goods. The Politburo has concerns about the “growing downward pressure” on the economy from a hostile international environment and says there are also “many difficulties with certain enterprises and the emergence of risks accumulated over long periods of time”.
As a result, China needs to be more forward-looking. It most strengthen reform and focus on core problems with targeted solutions. In short, “We must get our own things done and firmly seek high-quality growth.” The day after the statement was published, Chinese Vice-President Wang Qishan, adopted a more conciliatory approach. He told a Bloomberg New Economy forum, “China will stay calm and sober-minded and embrace greater openness. Both China and the US would love to see greater trade and cooperation. We’re ready to discuss and work for a solution on trade that is acceptable to both sides.”
However, now President Trump is likely to find it more difficult to get fiscal measures through Congress, he is likely to turn his attention more to the trade war and demands for Beijing to address rules over intellectual property theft and the Made in China 2025 programme. This aims to upgrade industry and increase the Chinese-domestic content of core materials to 40% by 2020 and 70% by 2025.
Hawkish Federal Reserve supports the US Dollar
The Dollar has since gained against Sterling, as the Federal Reserve left interest rates unchanged, but reaffirmed its monetary tightening stance. It is now almost certain that the US central bank will raise rates again in December and continue along this path in 2019 on the back of rising inflation and robust employment growth. With rates in the UK predicted to rise only modestly in 2019, the interest rate differential between the two countries should keep the US Dollar supported versus the Pound.
UK Prime Minster Theresa May ‘confident of Brexit deal’
There are now only four months until Britain is set to leave the European Union, and it looks like Brexit may at long last be reaching the end game. In recent months, the Pound has been dragged up and down by rumours of success and failure in reaching an agreement with the European Union over the exact terms of the exit and relief at avoiding the uncertainty of a no-deal Brexit. Now, a deal is so close that there are calls from MPs of all sides to see the legal advice concerning the last major stumbling block – finding a way of maintaining an open border in Ireland once Britain leaves the EU. The advice was requested by Prime Minister Theresa May and has been drawn-up by Attorney General Geoffrey Cox.
At present, the UK and Ireland are both part of the EU market and customs union, so there is no need to inspect goods and products. But after Brexit, Ireland and Northern Ireland may be subject to differing customs regulations, which would require border checks. MPs want to understand the implications of any backstop deal, but Downing Street says the government does not normally discuss such legal advice. Having survived the perils of the Tory conference and whispers of leadership challenges, UK Prime Minister, Theresa May, is reportedly confident of soon reaching a deal with Europe. However, she says this will “not be done at any cost” to the UK.
Should an acceptable deal be reached between Britain and the European Union, then the Pound is likely to receive a boost against the US Dollar, even if only temporarily. The UK Budget in late October, announcing the end to austerity, brought a boost in spending and a change in growth forecasts, bringing the Pound to a monthly low against the US Dollar. UK growth in 2018 was forecast to be 0.2% lower than expected at 1.3%, due to impact of bad Spring weather. But the 2019 forecast was raised 0.3% to 1.6%, with 2020 and 2021 growth estimated at 1.4%, 2022 at 1.5% and 2023 at 1.6%, Chancellor Philip Hammond announced.
Guidance for USD buyers
Sterling has failed yet again to breach the 1.3300 level on the upside and we have now seen lower highs on the last four attempts. Short of a genuine Brexit breakthrough, it is unlikely that we will see a sustained rally. Any move towards 1.3150/1.3200 would be a good opportunity to purchase US Dollars. Only a break below 1.2700 would suggest that we will move into a new, lower trading range.
Guidance for USD sellers
These are still decent levels to sell US Dollars, although we are currently in the middle of the recent trading range. It may be worth leaving protection above 1.3300 for longer term sellers, as this has not broken since early June. Any move back towards 1.2700 (a 12 month low) should be viewed as an opportunity to sell.
Article supplied by Halo Financial, November 2018.
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