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Pound-to-Dollar Rate Slumps to Two-Week Lows Amidst Investor Risk Aversion

Foreign exchange analysis

Image © Goroden Kkoff, Adobe Stock

The U.S. Dollar surged on the first full day's trade of 2019 amidst strong demand for 'safe haven' assets, a dynamic that appears to have also benefited the Japanese Yen.

The Dollar was seen a percent higher against Sterling with the GBP to USD conversion quoted at 1.2612 which at the time of writing is a fresh two-week low, recall it was only on December 31 that the exchange rate struck a three-week high. Meanwhile, an advance of 0.90% was seen against the Euro taking the EUR to USD conversion is quoted at 1.1354.

"The Dollar caught a safe haven boost with global markets in the red in the wake of dismal data from China and Europe," says Joe Manimbo, a foreign exchange analyst with Western Union. "It may be a new year but the same uncertainties continue to dog global markets."

When equities are being sold investors tend to liquidate holdings into Yen and Dollars, thus increasing the value of these two currencies.

2018 saw U.S. stocks suffer their worst year since 2008 when the global credit crisis reached its peak. Markets are presently concerned that the multi-year bull run in stock markets has come to an end and economic slowdown beckons with an ongoing tariff war between China and the U.S. only fueling concerns. Indeed, according to analyst Enda Glynn at Bullwaves, markets have entered a "long, long bear market down".

This could bode well for the Dollar in 2019, if the view is correct of course.

John Hardy, an analyst at Saxo Bank, warns that while we are currently seeing USD-supportive safe haven bids, there remains the risk that the Federal Reserve changes heart on raising interest rates again in the future, with some saying a cut could even take place next, which would likely bring USD weakness.

But, "the path to a weak USD is tough until the Fed goes into full reverse and brings back USD liquidity – likely via eventual de facto monetisation of US government deficits – that still appear some way off," says Hardy.

Global stock markets start the first trading day of 2019 on the back-foot, suggesting the sell-off that characterised 2018 is still with us.

China's Caixin/Markit Manufacturing Purchasing Managers' Index (PMI) for December fell to 49.7, from 50.2 in November, and follows a poor official PMI survey on factory output which fell from 50.0 to 49.4.

A number below 50 suggests contraction.

"The economy is weak and that stimulus needs to arrive quickly," says Iris Pang, Economist with ING Bank. "We believe that the data reflect that not only has the trade war damaged growth in the export sector. It has also hurt export-related supply chain companies and in turn, domestic demand."

ING expect the Chinese government to speed up the delivery of infrastructure investment to support the economy, which will mainly be through projects governed by local governments, e.g. new metro lines.

Furthermore, Pang says local governments will also likely ease housing measures.

Note that while the GBP/USD exchange rate is quoted at 1.2610 on the inter-bank markets, the rate on international payments being offered by high-street banks lies in the region of 1.2270-1.2360 while independent specialist providers are seen offering in the region of 1.25-1.2550.

 

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