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British pound strenghtens due to U.S. dollar's weakness
The British pound (GBP) rose by 0.87% against the U.S. dollar (USD) on Friday as the greenback weakened amid worsening U.S.-China trade tensions and rising global recession fears.
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Possible effects for traders
Like other major currencies, the recent rise in GBP's value is primarily attributable to the U.S. dollar's weakness, not the pound's strength. 'Part of the U.S. dollar weakness in the past few weeks has been linked to worries over a recession or the Fed cutting rates, but it's kind of gone beyond that. It's more really a loss of confidence and credibility in the dollar and then in U.S. policymaking. Typically, in risk-off episodes, the dollar should gain as a safe haven, but it's really been the yen and Swiss franc that have been picking that up, and the dollar has been under pressure', said Win Thin, global head of markets strategy at Brown Brothers Harriman in New York.
Fundamentally, the U.K. economy may also suffer due to higher tariffs, but traders are ignoring this possibility for now. Megan Greene, Bank of England (BoE) policymaker, said that it was unclear what U.S. President Donald Trump's import tariffs would do to U.K. inflation, with the unpredictable behaviour of the U.S. dollar adding to the puzzle. She noted the possibility of Chinese exports being diverted away from the U.S. and towards Europe, which could push prices down. 'The key channel, really is exchange rates, and that's been really difficult because exchange rates haven't operated in the past week as the models would suggest. The dollar has fallen instead of appreciating as you would expect', Greene said.
GBPUSD rose during the Asian and early European trading sessions. Despite an uneventful day, traders should closely monitor any developments concerning global trade tariffs today. GBPUSD will likely sharply correct downwards if the U.S. and China take a more balanced approach towards trade tariffs. Also, speeches from three Federal Reserve (Fed) officials later today may add volatility to all USD-related pairs. Key levels to watch are resistance at 1.31640 and support at 1.30622.
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