Pound-to-Dollar Rate Boosted after White House Declares State of Emergency Over Border Wall Funding

© The White House

- GBPUSD extends gains, USD softens, amid U.S "national emergency".

- White House aims looks to Defence Dept to build wall after budget clash.

- Anticipated court room fight has implications for "trade war" issues.

The Pound extended gains over a softer Dollar Friday after President Donald Trump declared a "national emergency" in order for him to secure funding for his proposed wall along the southern border with Mexico, raising the spectre of a showdown with Congress and more political dysfunction in Washington. 

President Trump told reporters outside the White House that funds will be redirected from certain parts of the defence budget in order to finance construction of a wall along the border, after Congress failed on repeated occassions to produce a 2019 budget bill that included funding for the project. 

"We have funds that are used at the discretion of the generals...some of the generals think this is more important than what they were going to use the funds for. We are rebuilding our military. We have a lot," Trump told reporters. "I expect to be sued. I shouldn't be, but I do."

Friday's statement came closely behind the longest government shutdown in history, which ended in January after an apparent capitulation by President Trump, who had allowed the government to close after opposition lawmakers refused to support a spending bill that contained funding for the wall.

Since then another bill has produced $1.3 billion, or around 20% of the total required, leading Trump to declare a national emergency Friday in order for him to redirect military funding toward construction of the wall. 

"We have an invasion going on...you don't have a border, you don't have a country. You know what I think will happen will be, sadly, I'll be sued. I'll be sued but then we'll win," Trump said on the lawn of the White House. 

The announcement matters for markets because of what it might mean for President Trump's approach to some international issues. Currency analysts are concerned that if he is defeated in the fight to build a wall along the border with Mexico, he could try to curry favour with supporters by toughening his stance on other issues like trade with China.

"Trump is going to sign a stop-gap spending bill; but he is also going to declare a national emergency and build the wall anyway. And on that front markets need to wonder both what a constitutional crisis in the US looks like, and if that looks like a man who is going to fold on China," says Jane Foley of Rabobank. 

Above: Pound-to-Dollar rate shown at hourly intervals.

The Pound-to-Dollar rate extended what was a tepid gain to trade 0.41% higher at 1.2850 following the statement while the Euro-to-Dollar rate pared an earlier loss to trade -0.21% lower at 1.1271.

The Dollar index was quoted 0.10% higher at 97.07 following the announcement, although it fell from the 97.20 level it saw earlier in the session ahead of an during the address. The index is up 1.1% for 2019. 

Above: Euro-to-Dollar rate shown at hourly intervals.

"They want to win an election and it looks like they might not be able to do that. And this is one of the ways through which they think they can do that, through obstruction and all kinds of other nonsense," Trump said Friday, referring to the anticipated legal challenge by the Democratic Party and other organisations. 

Negotiators have been in talks aimed at ending the trade war between the world's two largest economies since early December after Trump threatened to target all of China's annual exports to the U.S. with tariffs and to raise the levies already charged on some of its goods trade.  

March 01 will see U.S. tariffs on around $200 bn of imports from China more than double to 25% if a deal ending China's "unfair trade practices" isn't reached by then, although Trump has recently said he's open to the idea of allowing negotiators an additional 60 days to make a deal if necessary. 

"There’s also no guarantee Congress will allow the move to stand," Rabobank's Foley says of Friday's declaration. "But if it does, Trump is emboldened; and if it doesn’t, he needs to look tough somewhere else with bipartisan support. And that’s China, folks."

Any renewed escalation of the trade war with China, or a second conflict opening up with the European Union, will have significant implications for the Dollar and markets more broadly. Both Chinese and European economies have been hurt by the trade war, pressuring their currencies. 

The Dollar had remained firm throughout 2018 as the trade conflict escalated, which put downward pressure on all rival currencies including Pound Sterling, although its advance has since been stemmed by a monetary policy shift from the Federal Reserve (Fed). 

The Fed said in January it will be slower to raise rates this year because it wants time to observe future developments in the global economy, given a slowdown overseas could easily undermine U.S. growth and inflation prospects.

Investors had since then begun to speculate that rather than raising rates again, the Fed could soon begin to cut them given a softer outlook for the economy, and there's no telling what markets would begin pricing in if Trump were to feel compelled to seek victory in an extended trade scrap with China or the EU.

Sunday marks the deadline for the U.S. Commerce Department to submit a section 232 report to the President outlining what threat European car exports might present to national security.

"Given the focus on the US-Chinese negotiations, the coverage of auto tariffs has drifted into the shadows," says Martin Enlund, a strategist at Nordea Markets. "Trump used exactly such a report on steel and aluminium to issue an executive order on metal tariffs."

The Commerce Department previously labelled imports of steel and aluminium from a range of countries including Canada and European Union members as threats to security, which provided President Donald Trump with the pretext required for him to impose tariffs on imports of steel into the U.S.

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