Pound vs Dollar: GBP/USD Exchange Rate Climbs on Norway?s Vote of Confidence

September 5, 2017 - Written by Ben Hughes

STORY LINK Pound vs Dollar: GBP/USD Exchange Rate Climbs on Norway?s Vote of Confidence

The Pound to US Dollar exchange rate climbed today (despite some disappointing data releases) on news that the world’s largest sovereign wealth fund has issued a vote of confidence in Sterling.

Norway’s $1 trillion oil fund has advised sweeping changes to its $333bn bond portfolio that include dropping the Japanese Yen (JPY) as well as emerging market and corporate bonds. Instead, it has been advised to concentrate its core holdings of debt into euros (EUR), Dollars and Pounds by including securities denominated in said currencies.

A letter sent to the Norwegian Finance Ministry stated:

‘In the long term, the gains from broad international diversification are considerable for equities but moderate for bonds. For an investor with 70% of his investments in an international diversified equity portfolio, there is little reduction in risk to be obtained by also diversifying his bond investments across a large number of currencies.’

Stephen Jen, Currency Expert at EurizonSLJ Capital lent his thoughts on the subject:

‘This is a very significant move. It is extraordinary that they have opted for the UK as world number three for investment ahead of China and Japan’.

This move is ultimately a vote of confidence in a post-Brexit United Kingdom, something that has lent the Pound some sorely-needed buoyancy as Brexit negotiations continue to disappoint.

UK PMI Reports Fall Short of Expectations, GBP USD Unperturbed

The UK’s service sector growth hit an 11-month low in August, according to today’s IHS Markit/CIPS services PMI.

The report demonstrated a fall from 53.8 to 53.2, below the expected figure of 53.5, and revealed the slowest expansion within the service sector since September last year.

This drop was mostly due to a fall in new order growth and business activity as a whole, which was made worse by a continued softening in client demand. This inactivity has developed within businesses due to ongoing insecurity regarding the future of the UK economy - indeed, many are afraid to make significant investments until a satisfactory amount of progress is made in the Brexit negotiations.

New car sales also disappointed in August, falling from 6.4% year-on-year to 76,433. This was the lowest value demonstrated for an August period since 2014 and printed as the fifth consecutive annual fall.

Overall the Pound has remained remarkably resilient, however, with Norway’s sovereign fund re-evaluation and today’s disappointing US factory order data keeping the Pound bolstered.

US Factory Orders Disappoint, USD Comes Under Pressure

New orders for US manufactured goods dropped -3.3% month-on-month in July this year after growing 3.2% (an eight month high) in June. This was the most significant drop in new orders since August of 2014, with falls in demand for transport equipment, motor vehicles and miscellaneous machinery being predominantly responsible for the slump.

Demand for the US Dollar immediately took a nosedive in response, further cementing todays GBP USD gains.

GBP USD Forecast: UK and US Balance of Trade on the Horizon

Both the UK and the US balance of trade figures are expected to be released this week, with the United States figures due tomorrow and the United Kingdom’s figures due on Friday.

As it stands, markets are expecting the US deficit to slightly shrink from $-43.6B to $-44.2B, a narrowing that would likely propel the ‘Greenback’ and push GBP USD back down. The UK’s balance of trade in July is forecast to widen, however, from £-4.56B to £-4.7B, something that will only compound a US Dollar lead.

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