The pound rallied to a two-month high of US$1.2508 versus the dollar in the previous session. The pair ended the previous week 1.8% higher than it started; the second straight week of gains. The pound is moving lower at the start of the new week.
| 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 advanced across the previous week as investors became increasingly optimistic that the UK could avoid a disorderly, no deal Brexit. Rumours circulated on Friday that the northern Irish DUP party, could be willing to accept a watered-down version of the Irish backstop. Whilst the party, which props up the government has denied the rumours, pound investors were still feeling optimistic.
Over the weekend, Brexit minister Steve Barclay played up the chances of the UK agreeing a Brexit deal with the EU. He claimed that the EU were ready to be “creative and flexible” to avoid a no deal Brexit. Although he also warned that there was still a significant distance between the two sides.
Today the focus will be on Brexit talks. Steve Barclay will meet with Chief EU negotiator Michel Barnier. Prime Minister Boris Johnson will meet with European Commission President Jean- Claude Juncker. Political analysts expect the PM to say he wants a deal, but he is not willing to extend the 31st October deadline. The news flow coming out of these two meetings will direct the pound at the start of the week. Any signs of progress towards a no deal could lift sterling higher.
| 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 aside, UK inflation data on Wednesday and the Bank of England monetary policy announcement on Thursday could also attract some attention. However, given that the central bank’s hands are tied until there is further clarity over Brexit, movement in the pound could be limited.
Dollar Investors Look To Wednesday’s Fed Rate Decision
The dollar slipped lower across the previous week amid a mixed batch of data and as relations appeared to thaw between the US and China.
US core inflation increased at its fastest rate in a year in August. US retail sales also climbed by more than forecast. However, an underlying gauge of consumer demand grew at the slowest pace in six months.
Investors don’t expect the positive surprises in core inflation and headline retail sales to change the Fed’s course of action. Market participants expect the US central bank to cut interest rates when they meet later this week. The FOMC rate announcement on Wednesday will be the most closely watched event of the week.
| 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. |
The dollar is not reacting so far to the attacks over the weekend to the Saudi Arabian oil infrastructure.
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