Question

What are the prospects for the US$ and UK sterling over the following two years? What implications does this have for the UAE Dirham?

Answer 1

Factor affecting US Dollar, UK Sterling for next two years and its implications on UAE Dirham are as follows:

US Dollar

GDP growth rates - US economy is expected to grow at GDP rate of around 2.5% (+/- 0.5%) in next two years.

There are many voices in the market that are signalling about declining US GDP growth rate including recession. Despite such voices in the market, the US economy continued to perform well on relative basis and GDP growth rate is been between 2% to 3%. Further, many financial institutions have predicted GDP growth rate of US in positive terms. On average the predictions of GDP growth are about 2% (+/-0.5%) for the next 2 to 3 years.

In such kind of scenario plus economic measures taken by Trump Administration, US economy is poised to do well in coming 2 years. Despite trade sanctions, import and export activities will increase which will ensure higher demand for US dollar leading to strength in US dollar in coming 2 years.   

Interest Rates - Fed policy and interest rates will have a huge impact on US dollar inflows and outflows in coming 2 years.

Either it is a hawkish policy or tightening policy, increase in interest rates will increase the demand for US treasuries and vice-versa. This fact becomes more prominent given the growth rate of fast growth economies, such as China, is slowing down. It gives rise to a situation where commodities prices will not increase significantly and investors will move their investments into safer instruments such as US bonds, US treasuries and more. This will increase the demand for US dollar for the next 2 years and thus, US dollar is expected to be strong against major currencies.      

Higher Demand for Oil - Oil demand is expected to rise further giving boost to US dollar in next 2 years.

India and China, are the biggest importers of oil in the world on combined terms. Despite concerns about growth momentum slowing down in such countries, demand for oil in such countries in increasing and is expected to increase further in coming 2 years. This fact will ensure that demand for US dollar remain high in next 2 years from such countries as oil traded with US dollar globally. Further, US is also exporting oil to many countries giving support to US dollar.

Impact on UAR Dirham - Positive economic outlook and higher probability of increase in US interest rates will ensure that US Dollar will remain strong against UAE Dirham. However, higher demand for oil in many countries will also ensure higher US Dollar inflows for UAE. This will even out the impact of strong US Dollar demand against UAE Dirham. Thus, outlook for UAE Dirham is stable against US Dollar in next 2 years.

UK Sterling

Brexit Uncertainties - Whether there is a deal with the EU or not, on March 29, 2019, UK will leave EU. This gives rise to uncertainties in UK Sterling for short term as well as next 2 years.

In a scenario where there is deal with EU, the uncertainties will be low and the impact on the UK Sterling will largely depend upon terms & conditions which needs to be followed in the transition period which starts from March 29, 2019 to December 31, 2020.

In a scenario where there is no deal with EU, the uncertainties will be very high and the impact on the UK Sterling will be on large on either side post March 29, 2019. Many economists predicted negative outlook for the UK Sterling in case of no deal with the EU as it will give rise to situation of disruptions to businesses in the short term followed by long term impact on UK economy.

Economic Outlook - Given the slowdown in global GDP growth rate momentum, UK economy is also expected to perform on global terms.

Many financial institutions have predicted that global economy GDP growth rate momentum will slow down further in coming 2 years. This will weigh in GDP growth rates of UK as well. Exports are expected to impacted highest. In addition to it, Bank Of England have also downgraded UK growth forecast in future. Thus, UK economy is expected to perform on global growth rates or below that and it will decrease the demand for UK Sterling leading to negative outlook for UK Sterling in next 2 years.

Impact on UAR Dirham - Given the uncertainties due to Brexit and weak economic outlook, demand for UK Sterling will be less against UAE Dirham. This gives rise to situation where UK Sterling will underperform. Thus, UAE Dirham will be highly positive against UK Sterling for the next 2 years.