The pound climbed to its highest level versus the US dollar in two months on Thursday thanks to encouraging headlines over Brexit. The pound hit US$1.4247, its highest level since February. The pound has only traded at this level and handful of times since the Brexit referendum in 2016.
|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.
With no high impacting UK economic data investors focused form on Brexit headlines from Brexit Secretary David Davis. Mr Davis said the he believed that the chances of a Brexit deal not happening were tiny. This boosted confidence that a Brexit deal will go ahead, even though the border in Ireland still doesn’t appear to have been resolved.
A Brexit deal going ahead means that the Brexit transition deal will also happen. This is good news for the pound as it gives UK businesses two years to adjust to the new reality of being outside the European Union, making for a smoother exit for these businesses and therefore for the UK economy. This is 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.|
Once again, the UK economic calendar is empty today. Investors will need to wait until next week for fresh UK economic data to drive the pound. This will come in the form of UK inflation data, which is expected to attract significant attention. Last month inflation climbed to 2.7% from 3%. Investors will be keen to see if this pattern of falling inflation continues.
Demand for the dollar was strong across the board, albeit slightly weaker than that for the pound. The dollar enjoyed a bounce from the selloff earlier in the week, as concerns over an escalation over Syria eased slightly. Despite President Trump’s tweet that bombs were coming, the US has not actually made any decision to bomb Assad over the chemical attacks in Syria, confirmed US defence secretary Jim Mattis.
Mr Mattis assured that bombing is no substitute for policy, however France and the UK have said that they stand ready to support the US should military action be taken. The less aggressive stance from Mr Mattis eased the pressure off the dollar, which was broadly higher by the end of the session.
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.