GBP/USD Rate on the Up thanks to Latest North Korean Missile Test

The GBP/USD exchange rate receives a boost from North Korea's renewed belligerance and analysts suggest it might go higher still.

The US Dollar ceded ground to Sterling during early trading Tuesday as unease rippled across markets in the wake of North Korea’s latest missile test and as America’s fourth largest state economy continued to battle against the fallout from Hurricane Harvey.

North Korea test fired a missile overnight, which travelled through Japanese airspace and across part of the mainland, threatening to reignite a war of words between Japan’s closest ally and the hermit Asian Pacific state.

“The launch of a ballistic missile over Japan by North Korea has intensified concerns in the region that the latest actions could prompt more assertive action against North Korea,” says Derek Halpenny, head of global markets research at MUFG.

The Pound to US Dollar exchange rate had risen by 27 points, to 1.2960 at the end of the first hour of trading, which was in contrast to the British currency’s performance against all of its other major counterparts.

Sterling was trading lower against the Japanese Yen, Swiss Franc and the Euro on Tuesday, seeing its biggest fall relative to the Swiss franc. The pound to Swiss franc exchange rate dropped 0.55% to 1.2285.

“This will likely continue to run as an issue for the markets in the background but certainly is one further reason for caution in being exposed to the US Dollar versus the core G10 currencies like the Yen, Euro and Swiss franc,” Halpenny added, in his morning note to clients.

The United Nations Security Council voted unanimously in mid-August to impose further sanctions against North Korea for having test fired a ballistic missile that experts said could have had sufficient range for it to have been able to reach the United States.

North Korea’s leadership also said shortly after that it would soon test fire another missile, although that time in the direction of Guam, an island which houses a US military base, drawing threats of retaliation from President Donald Trump.

Kim Jong Un of North Korea made a very wise and well reasoned decision. The alternative would have been both catastrophic and unacceptable!

— Donald J. Trump (@realDonaldTrump) August 16, 2017

“The missile launch undermines hopes for dialogue with North Korea following a period where tensions appeared to have cooled,” says Andreas Johnson, a strategist at SEB Bank.

The outlook for the GBP/USD exchange rate remains constructive at this stage, despite heightened focus on Sterling owing to the ongoing talks between the U.K. and E.U. in Brussels.

Analysts at LMAX Exchange say we should look for the market to continue to be well supported, with any additional weakness limited to the 1.2600s in favour of an eventual push back up to fresh 2017 highs and towards the next key objective in the 1.3500-1.4000 area further up.

“Still, there is risk for an extended period of choppy consolidation before the bullish continuation plays out, which means rallies could be well capped below 1.3100,” say LMAX Exchange in a technical briefing dated August 29.

Tuesday morning’s price action comes as Texas, which is America’s fourth largest state economy, continues to grapple with the destruction wrought on it by Hurricane Harvey, which has led to wind damage and flooding in some parts.

Flooding has been worse in the Houston area, with some parts of it underwater, although the number of deaths and people displaced by the disaster is much lower than seen in 2005 when Hurricane Katrina struck Louisiana and New Orleans.

“Predictions of damage vary widely at this point (USD 30bn has been mentioned) but although the destruction has been substantial it should be smaller compared to the effects of Hurricanes Katrina and Sandy...Harvey will have little effect on aggregate US GDP but will cause a short-term blow regionally,” says Johnson at SEB.