Pound to US Dollar Exchange Rate Surges to Two-Year High

Sep 17, 2020 5:05 PM ET

The trade-in of the Great British Pound (GBP) has turned into a mixed basket after the statement from the Bank of England’s (BoE) governor Andrew Bailey.

During the Federal Reserve’s Jackson Hole Summit, Andrew Bailey stated that monetary tightening is still quite a long way ahead from the point where the British economy is right now. He also indicated that negative interest rates are going to last for that much longer.

The main problem that has caused the British economy to the sore is the novel coronavirus pandemic which has been hitting the world from all sides. The global economic lockdown with little to no international movement including the transportation of goods as well as the shutdown of some of the most crucial economic industries like airlines and the tourism sector has also left a number of countries floating in the water. While Great Britain is not as tourism-dependent as some of the other European nations it has still impacted the country in the most negative way possible. Adding fuel to the already raging fire is the COVID-19 infection rates that are still high up in Great Britain. The main problem being that the social distancing laws were not implemented in time. Boris Johnson, the prime minister of the UK, was one of the people infected by this virus who fortunately succeeded in fighting the infection, however, a number of people were not so successful. The virus is especially worrisome to elderly people or those with some health issues preceding the infection.

All of this has caused a number of problems including the unemployment rate rising to critical levels. Although Lloyds Bank’s business barometer has shown an increase of 8 points, now sitting at -14, experts believe this to be a very short-lived affair. This is mostly caused by the fact that the British government has proved unable to efficiently quell the problem with infection rates still hitting quite high numbers and the already infected people filling the emergency rooms. Hann-Ju Ho, Lloyds Bank’s economist, has reinforced this notion in the minds of skeptics when he stated that the low levels of confidence, as well as high market uncertainty with the addition of the historic 20% shrink of the economy, will not let the British economy recover so easily. The Finance minister of the UK, Rishi Sunak, has disproved any hopes of state-funded program Coronavirus Job Retention’s continuation.

The GBP/USD continues to make quite some gains though now hitting the historic 2-year-high of $1.34. The foreign exchange market is one of the clearest things to see this movement in. The main difference between direct and indirect quotes in FX is that the direct currency quote is when the first currency is the native one. What these historic 2-year-high means is that now with 1 GBP the trader can buy the highest number of USD. This is mostly due to the uncertainty that has been caused by the economic shrinking of Great Britain and thus pushing people to abandon the GBP trading. Since it fell out of circulation the currency naturally started to gain some strength due to the deficit in the market. Apart from this, a lot of Fintech companies are complaining that the stimulus package that the state has pushed towards the firms that are affected by this change is not applicable to fintech companies. In fact, firms that work in different sectors have a limitation that they should not be funding the fintech sector in order to get a loan from the British government. This is not to say that other currencies are faring better though.

Euro also shows the currency slipping due to the tight restrictions that the EU countries are enforcing. The EUR/USD is at the two-year highest at this point. The currency trading during the whole Friday was extremely defensive due to the announcement that some of the European countries are tightening their COVID-19 restrictions to deal with the possible second outbreak. The EUR investors are also startled by the Eurozone’s latest Consumer Price Index (CPI) report  which shows that inflation is also slowing down. The situation is made even more uncertain by the statement of Germany’s state officials who have warned the citizens not to travel to high-risk areas as apparently the “corona is fully back in Germany.”

Due to the ongoing developments, even in the face of extreme amounts of coronavirus infections, the US dollar is being traded very widely in the FX sector. The Federal Reserve has also shifted the policy where it is pushing a new agenda to decrease the interest rates to help alleviate the problem with the unemployment rate as the news reports show that, unlike previous beliefs, the rise in inflation directly affects the aforementioned statistics in a positive way.

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