The pound ended the previous week down against the dollar. Brexit concerns and a stronger dollar was sufficient to see the pound US dollar exchange finish 0.5% lower on the week, languishing around US$1.3470. The pound continues to trade at levels not seen since December last year.
|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 UK economic calendar has been very light since mid-last week. Instead investors have been focusing once again on Brexit developments. Last week in an unprecedented move, the Scottish Parliament voted against the UK – EU Withdrawal Bill. This was a largely symbolic move as the UK Prime Minister can override the vote. However, it shows the growing rift between the two nations. Furthermore, should Theresa May opt to ignore the Scottish vote, it will give ammunition to Nicola Sturgeon and the SNP party for Scottish independence. Just this weekend Nicola Sturgeon the Scottish leader has said that Scotland will look again at the idea of independence once Brexit terms become clearer. This political risk in not good for the pound.
|How does political risk have impact on a currency?|
|Political risk drags on the confidence of consumers and businesses alike, which means both corporations and regular households are then less inclined to spend money. The drop in spending, in turn, slows the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. Signs that a country is politically or economically less stable will result in foreign investors pulling their money out of the country. This means selling out of the local currency, which then increases its supply and, in turn, devalues the money.|
There is no high impacting UK data until midweek, when investors will be watching inflation data for April. Headline inflation fell in March to 2.5%. Whilst analysts are expecting the headline figure to remain constant, they forecast core inflation will fall. Should this be the case, the pound could fall further.
The US and China stepping back from the brink of a trade war, help lift the dollar to fresh 5 month higher. The Trump administration has promised to hold back on tariffs towards China. China, in return has promised to significantly increase its purchases of US farm exports and energy. Whilst the announcement was relatively vague, it was sufficient to lift optimism that a full-blown trade war will be averted.
The dollar has also been lifted over the past month on market participants growing in confidence that the Fed will look to steepen its path of rate rises. With this in mind, investors will pay close attention to the release of the Fed’s minutes from the monetary policy meeting data May 2nd. These will be released on Wednesday. A more aggressive sounding Fed will help boost the dollar northwards.
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.