The pound closed 0.1% higher versus the dollar on Tuesday. The pound US dollar exchange rate fell across most of the session before rebounding higher later in the day, cementing a close at US$1.2738.
|What do these figures mean?|
|When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.For example, it could be written:1 GBP = 1.28934 USDHere, £1 is equivalent to approximately $1.29. This specifically measures the pound’s worth against the dollar. If the US dollar amount increases in this pairing, it’s positive for the pound. Or, if you were looking at it the other way around:1 USD = 0.77786 GBPIn this example, $1 is equivalent to approximately £0.78. This measures the US dollar’s worth versus the British pound. If the sterling number gets larger, it’s good news for the dollar.|
As trader attention focused on Brexit, the pound slipped lower. Senior conservative ministers joined a cross-party group which voted 303 – 296 in favor of a no-deal Brexit prevention tactic. The 303 ministers voted in favor of preventing the government from modifying taxes in the case of a no-deal Brexit. This is the first of several similar amendments that political analysts believe will be voted on in bills to the same effect.
These no-deal Brexit prevention tactics could mean that ministers are more likely to not vote for Theresa May’s Brexit deal. Many ministers dislike Theresa May’s deal but they are also against a no-deal Brexit. Up until now the reason for voting for Theresa May’s Brexit deal was in fear of a no-deal Brexit. However, if ministers tie the government’s hand over a no-deal Brexit then the chances of Theresa May securing the numbers to push her Brexit deal through Parliament are doubtful. The pound initially fell reflecting concerns of Brexit uncertainties should Theresa May’s deal fail. The pound later rebounded as the prospect of a no-deal Brexit slipped further away.
|Why is a “soft” Brexit better for sterling than a “hard” Brexit?|
|A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e. immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound-friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value.|
Brexit will remain in focus as the house of Commons debates the Brexit deal for 4 days, starting today.
The dollar traded broadly higher versus its peers on Tuesday after falling for the past two sessions. The dollar trades inversely to the euro. Growing signs of recession risk in Germany and the eurozone following weak economic readings dragged the euro lower boosting the dollar.
Despite yesterday’s rally, the outlook for the dollar is still gloomy after the Federal Reserve’s Chair Jerome Powell said that the central bank remained flexible over monetary policy. Powell also confirmed that the bank will be sensitive to the downside risks in the market.
|Why do raised interest rates boost a currency’s value?|
|Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.|
Today the US economic calendar is extremely light as the continued US government shutdown means that a significant amount of data is being withheld from the markets. The minutes from the Federal Reserve meeting are due, however, but they could be considered out of date following Powell’s speech on Friday.
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