The US dollar sunk against the pound on Wednesday, sending the pound US dollar exchange rate higher. The rate powered through US$1.34 to hit a 2-week high of US$1.3430 for the pound. The surge higher in the pound US dollar exchange rate, in the previous session, was more related to dollar weakness than any particular pound strength.
|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.
Traders of the pound continue to look for Brexit headlines to drive the price of the pound. With politicians away for the Christmas break, there a few headlines. However, pound traders were relieved to read a comment from Lord Macpherson, the UK Treasury’s most senior civil servant prior to Brexit. Lord Macpherson stated that he didn’t believe the impact of Brexit should be large on the UK economy if the UK government seizes policy opportunities and aligned itself close to the EU. His comments are particularly important given that before the Brexit referendum, he was part of “project fear”. This was a group which claimed that Brexit would have an apocalyptic impact on the UK economy.
Market participants will look towards the 2nd phase of Brexit talks, which are due to start in March. Here discussions will centre around the future relationship of the UK and the EU, and a trade deal. Should the UK achieve a good deal, a smooth Brexit will be more possible, which is 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.|
The dollar remained under pressure as data showed that US consumer confidence slipped more than analysts had expected. US consumer confidence dropped to 122.1, down from the previous month’s 17 year high of 129.5. The fall was larger than the slight drop to 128 that analysts had pencilled in. The decline in confidence comes from a slightly less optimistic view towards the economy and potential job opportunities.
|Why does poor economic data drag on a country’s currency?|
|Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.|
However, while the figures were weaker than analysts had predicted, they still remain at historically high levels.
Today data for the US continues to flow in. The more relevant data for exchange rates will be the US trade balance and jobless claims.
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.