After sinking in early trade on Tuesday, the pound US dollar exchange rate rebounded to close 0.2% higher at US$1.2091. The pound is advancing further versus the dollar in early trade on Wednesday.
| 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 recovered in the previous session and continues to advance following the Brexit showdown in Parliament on Tuesday evening. Prime Minister Boris Johnson lost his Parliamentary majority and later was defeated in a crunch vote by a Conservative rebel alliance. The group of 21 Conservatives joined forces with Labour and the opposition to vote to take control of the agenda in Parliament today in a bid to pass legislation to prevent a no deal Brexit. The rebel alliance defeated the government by a larger than expected 328 votes to 301.
Boris Johnson’s Brexit strategy is in tatters and he is running a very unstable government. Boris Johnson warned that he will never ask the EU for an extension and has instead called for a snap general election to be held 15th October.
Usually such high levels of political instability would drag a currency’s value lower. However, the pound rallied because the UK has moved a step away from a no deal Brexit. Economists and business leaders have often stated the dangers of a no deal Brexit to the UK economy. Therefore, when the UK moves away from that option the pound rallies.
| 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. |
Today investors could quickly glance at UK service sector pmi figures. However, Brexit and political developments in Parliament will drive the pound.
US Manufacturing Data Sends Dollar Lower
Demand for the dollar took a hit in the previous session following data which showed that the US manufacturing sector contracted for the first time in three years in August. The ISM manufacturing printed at 49.1, well below the 51.5 analysts had been expecting. The figure 50 separates expansion from contraction. The US manufacturing sector is contracting as the US — Sino trade dispute weighs on the industrial economy. The market fears that there is more weakness to come, particularly as there is no end in sight for the ongoing trade dispute.
The weak data adds to the idea that the Federal Reserve will look to cut interest rates again when they meet in September. As investors reassess the probability of a rate cut the dollar fell.
| Why do interest rate cuts drag on 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. Lower interest rate environments tend to offer lower yields. So, if the interest rate or at least the interest rate expectation of a country is relatively lower compared to another, then foreign investors look to pull their capital out and invest elsewhere. Large corporations and investors sell out of local currency to invest elsewhere. More local currency is available as the demand of that currency declines, dragging the value lower. |
Today there is no high impacting US economic data. Instead investors will be listening closely to speeches by some Federal Reserve policy makers for further clues as to the next steps to Fed monetary policy.
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