Pound-Dollar Rate Caught In Trump's Merry-go-Round

Official White House Photo by Joyce N. Boghosian

Mixed signals from the U.S. President keep the dollar bid.

The pound-dollar exchange rate falls to 1.3214 on Thursday as sterling gives up the previous day's advance that saw it rise to 1.3346.

Those midweek gains were built on hopes that the war in the Middle East was close to ending as the U.S. President looked to make an exit, but Donald Trump told the nation overnight that there were still two to three weeks of hostilities ahead.

That undid the British pound's 'de-escalation' bounce and verified our analysis that rallies in GBP/USD would remain shallow and that the overall trend remains lower. Those with dollar payments due should benchmark their bank's rate against GBP/USD rates  to their bank before committing to a transfer.

“Current GBP/USD levels may not last – check today’s specialist rates before your bank reprices,” says a note from Horizon Currency, a specialist FX provider, in a morning note.

So here we are on Thursday, with the market clearly disappointed that the President's address didn't convey the message that U.S. operations were to wind down.

Those with a finger on the pulse of the conflict warned ahead of the speech that it was too soon to expect a U.S. withdrawal: how could they leave Iran seemingly in control of shipping through waters it shares with Saudi Arabia and the UAE? Those two Gulf states simply couldn't accept a status quo where Iran holds a determinant grip on regional shipping traffic.

Indeed, Trump said he was ready to escalate against Iran in the coming days unless some significant concessions were made, threatening to bomb Iran into the "Stone Ages" in the coming weeks.

In response to the speech, Iran fired a salvo of missiles at Israel, and we are yet to receive any official indication that the regime in Tehran is ready to give Trump what he needs to exit with some dignity intact.

Khatam al-Anbiya, Iran's operational commander, said: "With trust in Almighty God, this war will continue until your humiliation, disgrace, permanent and certain regret, and surrender. Await our more crushing, broader and more destructive actions."

"Appetite for the war has generally waned, particularly in the U.S. as approval ratings for President Trump have hit a low in his second term, while Trump’s perceived handling of the economy dropped below that of Biden's (and of Trump’s first term)," says Annabel Bishop, economist at Investec. " Such sentiment readings can be crushing to Presidents if they persist."

Oil prices are stable above $100 and uncertainty remains elevated, ensuring the conditions for ongoing U.S. dollar outperformance are intact.

To be sure, the dollar isn't running away, with upside checked by the significant market implications that a ceasefire entails.

When it is eventually announced, stocks will rally, oil prices will fall and the dollar will reverse sharply. You don't want to be on the wrong end of such a trade. So, for now, it's a case of a cautious, albeit discernible rise in the dollar that's characterised by consolidation and setbacks along the way.

For those navigating dollar payments in the interim, setting a rate order or forward contract now offers protection on both sides of that uncertainty.

Turning to GBP/USD specifically, a steady grind down to 1.30 looks to be intact, with rallies likely to be short-lived.