one-us-dollar-bank-note - USD

The pound closed 0.1% lower versus the US dollar at US$1.2212 amid growing no deal Brexit fears. The pair is advancing in early trade on Thursday.

Pound investors remain focused on Brexit. The pound briefly spiked higher on Wednesday before continuing its downward trajectory. Reports that the EU might offer a time limit on the Irish backstop lifted the pound, before a flat out rejection of the concession by the Northern Irish DUP sent the pound back lower again. Stalled Brexit talks have investors increasingly fearful that the UK will crash out of the EU on 31st October without a deal.

In a last-ditch attempt to break the stalemate, British Prime Minister Boris Johnson will meet with his Irish counterpart Leo Varadkar. Boris Johnson will be hoping to arrive at a breakthrough and has said that he is cautiously optimistic.

 

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.

 

In addition to Brexit developments, investors will also be watching the UK economic calendar. A barrage of data including manufacturing and industrial production, in addition to the monthly GDP could all provide clues as to the health of the British economy three weeks before Brexit.

Will US Inflation Boost Dollar?

The dollar ended the previous session broadly flat versus most of its peers, as investors weighed up trade talk developments and the minutes from the September Federal Reserve monetary policy meeting the FOMC.

The minutes showed that most policymakers were in favour of a second interest rate cut. However, they were generally more worried by the risks associated to trade tensions, geopolitics and the global economy rather than by the current state of the economy. The dollar had a muted reaction to the release.

Trade has been the other central focus for dollar investors. 13th round of trade talks are due to begin between China and US today. Over the past few days tensions between the two powers had escalated after Trump blacklisted 28 Chinese companies and restricted Chinese officials’ visas. Despite the negativity, China said it was keen to reach a limited agreement. President Trump was also sounding very optimistic over the chances of a deal. The reduced geopolitical risk means investors are moving out of the safe haven dollar

The dollar could get a boost from US inflation figures. Analysts expect consumer prices to have increased to 1.8% year on year in September, up from 1.7%.

 

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.

 

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