GBP/USD drops below 1.2400 on Trump tariff news
- GBP/USD declined to a fresh multi-month low below 1.2400 on Wednesday.
- US President-elect Trump is reportedly considering declaring a national economic emergency.
- The Federal Reserve will publish the minutes of the December meeting.
GBP/USD came under renewed bearish pressure and declined to its weakest level since April below 1.2400. At the time of press, the pair was trading at 1.2365, losing 0.9% on the day.
Trump tariff headline boosts USD
Citing four sources familiar with the matter, CNN reported that US President-elect Donald Trump is considering declaring a national economic emergency to allow for a new tariff program. This headline triggered a flight to safety and allowed the US Dollar (USD) to outperform its rivals. As of writing, the USD Index was up 0.5% on the day near 109.20.
Reflecting the negative shift in risk mood, US stock index futures turned negative on the day.
The ADP Employment Change report from the US will be watched closely. Market participants expect private sector payrolls to rise by 140,000 in December following the 146,000 increase recorded in November. Later in the American session, the Federal Reserve will release the minutes of the December policy meeting.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Author
Eren Sengezer
FXStreet
As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.
