The pound slipped lower versus the dollar across last week, despite the UK securing a deal on Brexit divorce bill with the EU. The divorce bill is an amount that the bloc wants UK to pay to cover for financial losses that Brexit will cause. The pound US dollar exchange rate ended the week at US$1.3392 for the pound.
|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.
At the end of last week, the EU announced that 2nd phase Brexit talks could commence. In this phase, discussions can begin on future trading relationships, which include trade deal and post Brexit transition deal talks. Progress to this next stage means that the UK is more likely to experience a smooth Brexit, which would be beneficial for the pound.
|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.|
However, after Thursday’s late rally on the news, investors started to become nervous that a trade deal could not be secured before March 2019. This could mean high levels of uncertainty as Britain leaves EU. As a result, the pound dropped.
This week the Bank of England (BoE) is due to give their monetary policy decision on Thursday. Economists are expecting the central bank to keep rates on hold. However, BoE Governor Mark Carney could suggest that UK inflation is still too high, which could prompt speculation over an additional interest rate hike next year. Inflation data will be released on Tuesday and employment figures and wages data is due to be released on Tuesday and Wednesday.
US Fed to Raise Interest Rates
Last week, the mood towards the dollar improved greatly. Hopes of a US tax cut bill being signed off this year, drove investors towards the dollar. The tax reform bill is due to include a corporate tax rate reduction to just 20%.
Also offering support to the greenback was Friday’s jobs report. The non-farm payroll showed that 228,000 new jobs were created in the US in November. This headline figure was well ahead of the 190,000 city analysts had forecast, which overshadowed the slightly weaker than forecast average hourly wage.
|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 week the focus will be firmly on the US Federal Reserve monetary policy meeting due on Wednesday. Investors are over 98% certain that the Fed will raise rates. This means that the following press conference and official forecasts could move the market more than any news of a rate hike itself. Should the Fed sound more aggressive over the future path of rate hikes, the dollar could rally.
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.