Pounds Drops to 9 Week Lows Versus Dollar

TransferWise content team
3 minute read

The pound US dollar exchange rate tumbled to a low of US$1.2807. A mixture of a strengthening dollar and a weakening pound has pushed the exchange rate to levels last seen 9 weeks ago.

Sentiment towards the pound has been declining as mixed data and Brexit fears prevent investors from buying sterling. Investors didn’t even find reason to buy into the pound after data showed that UK public sector finances hit a surplus in July for the first time in the in 15 years.

City analysts had been expecting a public sector net deficit of £1billion in July. Yet increased self-assessment tax receipts have meant that the government received £0.76 billion more than it spent last month. This failed to boost the pound, because it's most likely a one off. One month of good data doesn’t make a trend and the outlook for public finances isn't that strong. Analysts predict that government spending will increase towards the end of the year in order to tackle the fallout from Brexit.

As there's no high impact economic data due for the UK today, investors look ahead to tomorrow’s gross domestic product (GDP) reading. Analysts expect Thursday’s second estimate for second quarter GDP to be 1.7% on an annual basis and 0.3% on a month on month basis. Should the figure come in lower than what analysts have pencilled in, then the pound could drop sharply as investors would be increasingly concerned over the health of the UK economy.

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

Dollar rallies as US tax reforms are back on the agenda

Meanwhile demand for the dollar is on the increase. Positive news flowing out of Washington on tax reform legislation has helped boost the buck. Investors had been increasingly concerned that geopolitical and domestic political concerns, in addition to infighting in the White House was preventing the Trump Administration from focusing on pushing its pro growth agenda through. As a result the demand for the dollar had waned. Hopes by investors that the huge tax reforms are back on the agenda have pushed the dollar upwards.

How would Trump’s policies boost the U.S. dollar?
A sizeable corporation tax cut would see a flood of money repatriated to the USA which would then create a high demand for the currency and, in turn, increase its value versus other currencies. Infrastructure spending in a country already close to full employment would also push wages higher, leading to more spending and thus boosting inflation. Higher inflation leads to higher interest rates and a higher demand for the currency.

Investors are now waiting for the Jackson Hole central bankers meeting which starts tomorrow and goes into the weekend. The big question for dollar investors will be how optimistic Federal Reserve Chair Janet Yellen is about the US economic recovery.

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