GBP/USD: Can the Dollar Stand up to Rising Pressure on So Many Fronts?

30.08.17
3 minute read
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The pound dropped versus the dollar on Tuesday as concerns over Brexit progress prevented sterling traders from buying into the currency. Meanwhile the dollar was under pressure from various fronts. Moving into Wednesday the pound US dollar exchange rate was US$1.2926.

Today looks set to be a big day for the dollar with a several key events for dollar traders to digest. Firstly weighing on the US dollar is the rising concern over the cost of Hurricane Harvey. Whilst the hurricane itself has since been downgraded to a tropical storm, the level of damage caused by the floods is weighing on the mood for the dollar. This is because industries across the board in Houston and Houston port have been affected, which could weigh on the economy down the line. Moody’s rating agency has so far put the cost at a possible $65 billion in property damage and lost economic output.

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.

Secondly, the geopolitical tensions between North Korea and the US are also sending the dollar into a decline. Following North Korea launching a ballistic missile over Japan, US President Trump responded by saying that Kim Jong’s message has been received loud and clear, whilst warning “all options are now on the table.”

Usually the US dollar is considered a safe haven currency, ie a currency that holds up well in times of geopolitical problems. However, given the parties involved in this quickly escalating dispute, the euro is replacing the dollar as the safe currency of choice.

Looking ahead, dollar traders will be focusing on a speech by President Trump where he will discuss bringing in his long-awaited tax reforms. Investors are running out of patience waiting for progress on Trump’s pro-growth agenda, including the tax reforms. Concerns over his ability to push such reforms through Congress have kept the mood for the dollar depressed.

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.

Finally, today also sees the release of the US GDP. This would normally be a significant event in the economic calendar, however it runs a risk of being overshadowed by any further developments in the potential North Korean conflict. Any signs of weakness in the US economy could cause the dollar to slide further against its peers.

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