The pound weakened against the US dollar on Tuesday after UK MP’s rejected Boris Johnson’s plan to fast track Brexit through Parliament. The pound US dollar exchange rate closed Monday 0.6% lower at US$1.2884. The pair is edging higher in early trade on Wednesday.
British Prime Minister Boris Johnson’s Brexit deal made it over the first hurdle. MP’s voted 329 to 299 in favour of the new deal. However, MP’S drew the line there and refused to back a fast track procedure to push the deal through Parliament in 3 days. The timetable was rejected 322 votes to 308.
This means that it is virtually impossible for the UK to leave the EU with a Brexit deal by the end of the month. Whilst the pound slid following the result because uncertainty increases, the losses shouldn’t be too steep given that the two votes also take the UK even further away from a no deal Brexit.
The UK will now wait for approval for an extension from the EU. If the EU passes a short extension, the bill could receive some amendments and then pass in due course. If the EU grants a long extension, the outlook is more uncertain. This could open to the door to an election and or a move by the opposition for a second referendum.
Dollar Shrugs Off Weak Existing Home Sales
The dollar has had a quiet start to the week with few trade headlines to prompt movement in the greenback. Last week US economic data heightened concerns over the health of the US economy, dragging the dollar lower. On Tuesday US dollar investors digested more disappointing data.
Following two straight months of gains, US existing homes sales declined by more than analysts had expected in September. The Federal Reserve has cut interest rates twice this year and the cheaper mortgages have offered support to the housing market. Market participants believe that the Fed could cut rates again in the monetary policy meeting later this month.
|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.|
There is no high impacting US data due for release today. Investors will look ahead to tomorrow’s durable goods figures.
|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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