USD/GBP Analysis: US Debt Default Date Gets Nearer. Will the Dollar Retain Dominance over the Pound?


It’s all so predictable, isn’t it?

Politics and suspense go hand in hand, and when it comes to potential cracks in the economy and central monetary policy of the United States, the issuer of the world’s de facto reserve currency, that’s what keeps the markets going.

Over recent weeks, the global media and the US Federal Reserve have been engaging in a dance with each other, involving speculation and suspense in the advent of the United States government’s ability or otherwise to be able to maintain payments on its debt commitments after June 1 this year.

That date is now fast approaching, especially considering that today is a public holiday across many nations in Europe and North America, giving the reality of the outcome just two working days to make itself known.

Interestingly, very little impact has been felt by traders of the US Dollar, and today’s currency market shows no change in this dynamic.

Ordinarily, if one of the world’s most important and influential economies is about to become insolvent, the currency issued by its central bank would depreciate like an iron girder being thrown off a precipice.

In the case of the US Dollar, this has simply not been the case at all, and the US Dollar has continued its rise against other majors, especially the British Pound.

Indicative pricing only

By Thursday last week, the Pound was at a very low point compared to the US Dollar, perhaps demonstrating that those with a critical mind had cut through the fire being fueled by the media and realised that it would be entirely possible that a ‘last minute deal’ would be carved out among officials and lawmakers to raise the debt ceiling a day before June 1.

The Pound remained down compared to the US Dollar over the course of the last few days, culminating in the low point on Thursday, which was the Pound’s lowest value against the US Dollar for over a month.

As the fear of a default wore off, longer-term metrics that are actually tangible and have already taken place have come back onto the table, including the UK’s 10% inflation rate compared to the approximate 6% in the United States.

Interestingly, whilst still very much depressed compared to April’s values, the Pound appears to be making a small comeback against the US Dollar, which is an interesting area to watch.

Rather predictably, the news channels today are dominated by a potential ‘last minute deal’ to raise the federal government’s $31.4tn debt ceiling, which could take place within the next few hours if approved.

The Pound’s slight increase in value may be down to the possibility of the debt ceiling rise as being a damp squib – it is a band-aid rather than a resolution of the actual cause of the debt. This is an item that the Democrats and Republicans have not seen eye to eye on, therefore regarding any possible conclusion as being a ‘compromise’ between the two parties.

The stark reality remains that the US government spends more than it raises in taxes, and taxes are already very high, just as they are across many Western countries.

This is, therefore, an economic crossroads which has to be monitored.

The question is, will the Pound, along with other majors, rise again in value once the debt ceiling is raised and the initial notion that no default will take place is replaced by the reality that the debt is getting bigger and will one day need to be paid?

How will it be paid? Taxes are already difficult to afford, and the expenditure is higher than what can be raised. Meanwhile, the BRICS nations are building a bloc which is not only huge in demographic numbers but backed by raw material wealth and stratospheric levels of industrious commitment to hard work.

Volatility in the currency markets is here once again.

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