Cable – the rate of exchange of American dollars for British sterling – is the oldest continuously traded currency rate in the world, ever since the transatlantic cable from which it derives its name was laid between Great Britain and North America, ensuring regular transmission of the rate from Wall Street to the City of London and back again so that the rate would be the same in the world's two leading financial centres.
The $/£ rate over the last 45 years, as reported by the Bank of England, is shown in the chart below.
The chart shows that, since 1975, the average $/$ exchange rate has been $1.66 = £1. Over that period, Sterling's value has fluctuated between a low of barely $1 and a peak of almost $2.50. The low was hit in 1984, when the tight money policy pursued by US Federal Reserve under Paul Volcker drew speculative funds into the dollar to a point where it almost achieved parity with the £. The other notable period of Sterling weakness occurred more recently, when concerns about the potential economic impact of a "No Deal" Brexit led to a flight from the £ among international currency traders. This was compounded by the impact of the Covid-19 pandemic, resulting in a flight to safety in the form of the dollar and driving the £ down to just $1.15 on March 23rd 2020.
Since then, the £ has steadily recovered, its recovery consolidated by the post-Brexit trade deal concluded between the UK and the EU in December 2020 and the start of the UK’s Covid vaccination programme in January 2021. As at the date of writing this article, the spot rate of the $ is $1.36 – still below its 45-year average, but well above the lows hit in March 2020.
So where next for Cable? I would suggest that Sterling remains a "Buy" against the US dollar, on both technical and fundamental grounds:
Technical: as the daily chart above shows, Sterling is in a clear upswing against the Dollar, defined by Charles Dow in the Wall Street Journal of December 1900 as a phase when "the average of one high point in the index exceeds that of previous high points", and, correspondingly, when low points are above previously low points. As shown by the black arrow trendline in the daily chart, this upswing would only be broken if the $/£ exchange rate fell below $1.30.
Fundamental: the new Biden Administration is giving every sign of wishing to pursue an expansionary fiscal and monetary policy to drive economic recovery in the USA from the Covid-19 pandemic. The new US Treasury Secretary, Janet Yellen, told the Senate Finance Committee at her confirmation hearing in January 2021 that "Right now, with interest rates at historic lows, the smartest thing we can do is act big", adding that "the challenge is to get America back to work and defeat the pandemic". In plain English, she is planning a big increase in Federal spending, which implies a rising fiscal deficit and a sharp increase in the supply of dollars to finance it. As any economist will tell you, when there is a sharp increase in the supply of any commodity, its price is likely to fall. The dollar is no different.
Michael Nevin is the author of The Golden Guinea: The International Financial Crisis 2007-2014, Causes, Consequences and Cures.
