Monday, 21 November 2016

Sterling starting to give up gains against the U.S. dollar.

Friday saw the GBP/USD cross fall to its lowest levels for over two weeks, with the currency pair ending the week trading just above $1.23.


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Very little has changed during the first few hours of this mornings session, although the pound has gained slightly to leave the GBP/USD cross sitting at $1.2339 at the time of writing.


GBP/USD graph.

Following Donald Trumps shock election victory the pound has been benefitting from a shift in focus as investors started to concentrate on the potential economic fallout in the U.S. and the upcoming elections across Europe.

The change in mentality saw the GBP/USD cross climb as high as $1.2638 on the 11th November, but since then the pound has been gradually giving up the gains, and has now lost around 2.5 per cent in the last ten days.

A large proportion of the loss happened towards the back end of last week as the U.S. dollar surged against the majority of its counterparts. A raft of positive economic data from the States last week added to expectations of a higher inflation reading and a second rate hike from the Federal Reserve when they conclude their two day meeting on the 14th December.


What will a rate hike in the U.S do to GBP/USD?

If the Federal Reserve take any action next month I imagine we will see the dollar strengthen across the board. An increase to the Fed's benchmark rate will give investors a higher return on their investments, so its likely we will see increased flows into the dollar shortly after the announcement.

It is difficult to say how much the dollar will increase by, but when the Fed raised interest rates last year the dollar gained over two per cent against the pound, so its possible we could see a similar move next month.

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