The Pound has dropped by -0.4% against the US Dollar today, following a disappointing manufacturing activity measure.
This movement comes at a crucial time in UK politics, when the government faces a rising clamour to improve its treatment of public sector workers.
Pound Volatility Possible on Public Sector Pay Decision
The Pound’s future movement against the US Dollar may be tied to the government’s action on UK public sector pay.
A major debating point in the 2017 general election was that the UK public sector, particularly in the NHS, need to have the 1% pay cap removed.
This attitude was supported most strongly by Labour, with the Conservatives holding fast in resistance.
Recently, key Conservative officials like Michael Gove and Boris Johnson have supported removing the cap, putting further pressure on Theresa May to act.
Ultimately, however, any removal of the pay cap will need to be paid for, whether it’s via higher taxes or greater government borrowing.
If the cap is lifted, the Pound could appreciate in the near-term, as it could boost morale and retention in key public sectors.
Longer-term, however, a Sterling slide is possible on such news as the wider UK economy may have to suffer as part of measures to improve public sector conditions.
US Dollar Slump Possible if US-China Relations Deteriorate
In the future, the US Dollar may steadily drop against the Pound if the US-China relationship comes under increasing pressure.
While President Donald Trump seemingly had a cordial first meeting with Chinese President Xi Jinping in April, relations appear to have soured since then.
Trump was fiercely critical of the Chinese government during the 2016 Presidential Election, but seemed to set aside his differences once elected to office.
As Trump’s administration has progressed, the relationship with China has become increasingly strained. As well as having economic gripes with the Chinese leadership, Trump also takes issue with China’s apparent complacency in allowing North Korean nuclear tests.
Further worsening international relations has been an apparent break of the ‘One China’ US policy, with the US seemingly acknowledging Taiwan as a separate entity by setting up a $1.42bn arms deal.
On the physical front, a US warship has recently been sailed close to a disputed Chinese island in the South China Sea. These repeated acts of economic and physical provocation could backfire for the US in the future, if China launches an all-out trade war.
Trump has made no secrets about his desire for protectionism in the US, which contrasts with China’s increasingly outward-looking ambitions.
If China decides to move forward on the global stage and leave the US behind, the US Dollar could slide due to fears of the US taking an economic backseat in terms of international importance.
Recent Interbank GBP USD Exchange Rates
At the time of writing, the Pound to US Dollar (GBP USD) exchange rate was trading at 1.2965 and the US Dollar to Pound (USD GBP) exchange rate was trading at 0.7712.
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