The pound US dollar exchange rate struggled to remain above US$1.35 for most of Wednesday, before surging higher towards the end of the session. The pound managed to move towards the close 0.4% higher.
|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 pound spent most of the previous session out of favour with investors as market participants digested news that the Scottish Parliament was not going to vote through the UK’s EU withdrawal bill. Whilst this is more of a symbolic move by the Scottish government, it still puts U.K. Prime Minister Theresa May in a very difficult situation. She can override the decision, but that will simply provide more fuel for the SNP which is after independence.
The pound jumped higher on a report that the UK government was going to tell the EU that it intends to remain in the customs union beyond 2021. This would mean a soft Brexit which is more beneficial for UK businesses, the economy and therefore 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 beginning of this week saw flurry of U.K. economic releases; however, the calendar has been very quiet since. Today there are no influential releases, so Brexit developments will most likely drive pound US dollar price movement.
The dollar pushed higher in early trade in the previous session before coming under pressure as the day progressed. Sentiment towards the dollar started to waiver as geopolitical tensions heated up once more. North Korea had already pulled out of a meeting with South Korea and was threatening to do the same with the US. President Trump was due to meet with North Korea’s leader Kim Jong Un in Singapore on 12 June, however the North Korean leader is threatening to cancel if the US insisted on denuclearisation.
Also weighing on the dollar were cautious comments from St. Louis Federal a Reserve President James Bullard. Bullard said he was comfortable with the current path for hikes and said he would need to see more economic data beating analysts’ expectations to support the case for a faster pace of hiking rates. Most Fed members, including Bullard believe at least two more rate rises are appropriate this year.
|Why do raised interest rates boost a currency’s value?|
|Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.|
Today investors will continue to monitor the unravelling plans between Kim Jong Un and President Trump. On the economic calendar US jobless claims could create some volatility for the dollar.
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.