Hopes of a Brexit deal sent the pound surging 1.3% higher versus the US dollar in the previous session. The pair flirted with $1.28 before slipping 20 points into the close. The pound is paring some of those gains in early trade on Wednesday.

The pound surged on Tuesday amid last minute hopes of a Brexit deal. Reports said that the two sides were closing in on a deal. Negotiations continued late into the night and a deal remains in sight. However, Boris Johnson has yet to convince the Northern Irish DUP party to support the deal, even offering a cash payment to bring the party onside. Intense talks will continue today; however, a Brexit extension could still be required to iron out the details of any agreed deal.

Whilst Brexit will remain the key driver of the pound, weaker than forecast inflation figures are also adding pressure to sterling. Inflation as measured by consumer price index (cpi) remained steady at 1.7% in September, short of the 1.8% forecast and below the Bank of England’s 2% target. The weak reading will add to the case of a rate cut by the central bank.

 

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.

 

Will US Retail Sales Boost Dollar?

The dollar trended lower on Tuesday in a risk on session. An encouraging start to US earning season helped calm investor fears over the outlook of the US economy. Investors cheered a raft of upbeat corporate earnings as third quarter earnings season began with US banks. Results reflected a relatively healthy consumer and a more cautious business sector. The solid numbers helped quell concerns over the health of the US economy, lifting risk sentiment. When risk sentiment increases, investors often sell out of the safe haven dollar.

It has so far been a quiet week for US economic data. However, that changes today, with the release of US retail sales. Analysts forecast that US retail sales will tick lower to 0.3% month on month increase in September, down marginally from Augusts’ 0.4% increase. So far retail sales data has showed that the US consumer continues to spend despite the ongoing US – Sino trade dispute. Investors will be looking for signs that this trend will continue. High levels of spending well is not only good for the economy but it also lifts inflation.

 

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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