GBP/USD: Dollar Traders Look To Fed Rate Decision

The pound surged 2.5% and to a three-month high versus the dollar in the previous week. Brexit optimism sent the pound US dollar exchange rate to a peak of US$1.2707 on Friday before the pair eased slightly into the close. The pound is back below US$1.26 in early trade on Monday as Brexit optimism fades.

The pound rallied hard across Thursday and Friday on renewed hopes of a Brexit deal. Following a meeting between UK Prime Minister Boris Johnson and his Irish counterpart Leo Varadkar, Brexit talks hit a turning point. The tow leaders agreed that they saw a pathway to a deal. Reports following talks between EU Chief negotiator Michel Barnier and UK Brexit Secretary Steve Barclay on Friday were also positive. However, the pound has dropped lower at the start of the week as the EU cast doubts on Johnson’s deal.

Market analysts are expecting the pound to experience high levels of volatility this week given the Brexit timeline of events. Boris Johnson will attend the EU summit on 16th – 17th in an attempt to secure a deal with EU leaders before the UK is due to leave the EU on 31st October.

Intense Brexit talks are set to continue, and the pound will be directed by the headlines surfacing from these talks. Failure to secure a deal would mean that Boris Johnson would be forced to request the EU for an extension to Brexit. However, doubts exist as to whether he would do this given his “do or die” Brexit rhetoric.

 

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 the Queen will officially open the new session for Parliament. Boris Johnson’s policies will come under close scrutiny, ensuring that politics remain firmly in focus for pound investors.

Dollar Advances As Trade Concerns Return

The dollar moved lower versus its peers across the previous week as investors remained optimistic that the US and China would be able to achieve a deal. The 13th round of trade talks in Washington at the end of last week proved to be a success and a limited trade deal has been agreed between the two powers. The US will hold off from increasing tariffs on Chinese goods, in exchange for some Chinese concession, mainly related to agriculture. As geopolitical tensions eased, demand for the safe haven dollar declined.

Today the dollar is back in favour. Investors are scrutinising the much-hyped trade agreement and are now seeing it as a month-long standstill agreement rather than anything more. Adding to  the negativity, the effects of the trade dispute on China’s economy were evident with weaker than forecast Chinese trade data. Weakness in the world’s second largest economy is unnerving investors.

The US economic is quiet until Wednesday meaning dollar investors’ attention will remain on trade and geopolitics.

 

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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