The pound US dollar exchange rate charged higher on Thursday, in anticipation of the UK agreeing a Brexit deal with the EU. The pound rallied from a midday low of US$1.3327, to a session high of US$1.3485, returning to a level last seen on Monday.
|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 UK had been told that it must agree a deal on the Irish border before the deadline this weekend. Reports finally emerged on Thursday evening that a new draft deal on the Brexit Irish border issue has been proposed, as a result of talks between UK, Ireland and the EU Commission. The new proposal has also been shared with the Northern Irish Democratic Unionist Party (DUP), whose opposition to Monday’s proposal resulted in the Brexit talks breaking down. While the government has confirmed that the “dynamic is positive”, it also confirmed that more work needs to be done.
Should this deal be approved by all the parties involved then the probability of a Brexit deal being passed, increases substantially. This would mean that talks between the UK and the EU could progress to trade and transition deal talks, which would mean a smooth Brexit is more likely.
|Why is a smooth Brexit good for the pound?
|A smoother Brexit would be a scenario in which the economic consequences of leaving the European Union are minimised. This is favourable for the pound because the less the Brexit impact on the economy, the more likely that foreign investors will remain interested in the UK. Foreign investors need sterling to invest in the country and so the more GBP is purchased, the higher the demand and, thus, an increase in the currency’s value.
After a very quiet week for the UK economic calendar, today sees a slew of data released. The high impacting data points include 3rd quarter GDP estimates, a 21-month outlook inflation report, in addition to construction, manufacturing and industrial production figures. However, despite all the data, Brexit developments are expected to be the key driver for the pound.
The dollar continued attracting investors on Thursday, albeit at to a lesser extent than the pound. The dollar moved higher on continued optimism for the US tax reform, that is making its way through congress and on optimsm for US jobs data.
Today investors will switch their attention firmly to the US Labour Department’s jobs report. The data is expected to show that 175,000 jobs were created in November. This would point towards continued solid growth in the labour market, which is good news for the US economy. Should the figure come in higher, the dollar could rally.
|How does the non-farm payroll (NFP) affect the US dollar?
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the good and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes up the currency’s worth.
This article was initially published on TransferWise.com from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.