Friday, 9 December 2016

Why has the U.S. dollar strengthened?

The dollar has been gaining across the board since my post yesterday morning, after the European Central Bank (ECB) announced they will be extending their stimulus programme through to December 2017.

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On the back of the announcement investors have been flocking back to the safety of the U.S. dollar and as a result the GBP/USD cross fell over 1.2 per cent yesterday afternoon, with the currency pair dropping from $1.2701 to $1.2551.

GBP/USD graph.

However, the GBP/USD cross has rebounded slightly this morning after figures confirmed the UK's trade deficit narrowed more than expected for the month of October. The better than expected reading has helped GBP/USD rise back above $1.26 and at the time of writing is trading at $1.2610.

Focus on the Federal Reserve.

Next week will see the U.S. Federal Reserve announce their latest interest rate decision, with markets anticipating a rate hike for the first time since December 2015.

Although many believe the rate hike has already been priced into the price of the dollar, I personally believe that if Janet Yellen increases the central banks benchmark rate we will see the dollar gain against its counterparts on Wednesday evening.

With the uncertainty of the UK's exit from the European Union and the economic issues surrounding the Eurozone, investors will jump at the chance of a higher return and I can easily see GBP/USD losing another one or two per cent on the back of the news.

If that were to happen the GBP/USD cross could be trading back in the $1.23's by the middle of next week.

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