The pound once again moved higher versus the dollar last week, gaining 0.9%. This was the 5th straight week that the pound gained versus the dollar, rallying almost 4% since week beginning 17th December. The pound hit a high of US$1.3940 last week, its highest level since the Brexit referendum, before easing back towards the close on Friday.
|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.
Weaker than forecast UK retail sales data on Friday dampened sentiment towards sterling. Data showed that retail sales increased just 1.3% year on year in December, considerably short of the 2.6% that analysts were expecting. Furthermore, the figure confirmed a decline from retail sales growth of 1.5% in November. On a monthly basis, retail sales dropped -1.6%, lower than the 1% decline forecast by analysts.
These figures confirm that retail sales experienced the biggest fall since the Brexit referendum in June 2016, as high inflation and falling wages in real terms meant consumers reined in their spending as the pressure on their pay cheque increased.
This paints concerning picture for the UK economy, which is so dependent on the UK consumer. As a result, the pound fell.
Moving in to the new week, the pound could find itself supported by Brexit headlines. Britain’s hopes of receiving a bespoke Brexit deal were boosted after French President Macron said that the UK might get a special deal. Britain is unable to have full access to the single market, unless it adheres to all the EU rules. However, Macron said he envisaged a half-way house, something which had previously been ruled out by EU chief negotiator Michel Barnier. This would mean of softer Brexit, which is more beneficial for the pound.
|Why is a “soft” Brexit better for sterling than a “hard” Brexit?|
|A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e. immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound-friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value.|
The US government officially shutdown on Friday at midnight, after the US senate failed to pass a spending bill approved earlier by the House. This means that US government activities will come to a halt, until the funding is approved. Late Sunday there was still no sign of either the Democrats or the Republicans giving in, amid disagreements over Trump’s policy on migration. The fact that Republicans hold the majority in both houses, indicate how fragile President Trump’s authority is, even in his own party. The political instability is likely to weigh on the US dollar until there is a solution in sight.
|How does political stability boost a currency?|
|Political stability boosts both consumer and business confidence, which means corporations and regular households alike are more likely to spend money. The increased spending, in turn, then boosts the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. For foreign investors to put their money into an economy, they need local currency. As they acquire the money needed, the demand for that particular currency increases, which then boosts its value.|
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.