The pound held steady versus the US dollar on Monday. No deal Brexit fears weighed on the pound, whilst the dollar dropped on US. The pound-US dollar closed the session at US$1.2143. This is approximately the same level that it started trading at on Monday. The pound is edging higher versus the dollar in early trade on Tuesday.
| 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 USD Here, £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 GBP In 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. |
The pound was broadly under pressure in the previous session as no deal Brexit fears dominated. Boris Johnson’s spokesman spooked pound traders by giving the clearest affirmation so far that the UK will leave the European Union on 31st October, with or without a deal and regardless of any moves made by Parliament to avoid a no deal. His message that politicians could not pick and choose which votes to respect. “They promised to respect the referendum result and we must do so.”
Whilst no deal Brexit hit demand for the pound, sterling also received support from data showing that UK service sector data unexpectedly picked up in July. The service sector PMI ticked higher to 51.4, the highest reading since October last year. However rather than the start of a new upward trend, this is more likely an anomaly as fundamentally the service sector remains weak.
Today there is no high impacting UK economic data. Brexit developments will remain very much in focus driving the value of the pound. Opposition within Parliament is growing against Boris Johnson’s plan to crash out of the EU, this is offering some support to the pound on Tuesday.
| 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. |
US label China Currency Manipulator
The dollar was under pressure in the previous session. Demand for the greenback was hit by escalating tensions with China in addition to weaker non-manufacturing data.
After US President Trump added a further 10% of tariffs to $300 billion of Chinese imports last week, China retaliated by lowering the value of the yuan to sub 7 versus the dollar for the first time in 11 years. Concerns that the trade war will be ongoing and negatively impact the US economy sent the dollar lower. Weak service sector data compounded these fears.
| Why does poor economic data drag on a country’s currency? |
| Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall. |
Today there is little in the way of US economic data. Trade war developments will continue driving sentiment and the dollar. US Treasury formally labelled China a currency manipulator. This is broadly a symbolic move but could open the door to further tariffs. The dollar’s safe haven status is kicking in this morning supporting the dollar.
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