The pound fell against the US dollar on Tuesday as political concerns in Europe drove investors towards the “safer” US dollar. The pound dropped to $1.3205 versus the dollar, its lowest level in 6 months.
|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 political problems in Europe spilled over onto sentiment for the pound. Investors were giving a wide berth to European including British assets in favour of US assets as political problems continued to develop in Italy.
The newly proposed Italian Prime Minister failed to present a list of ministers to form an interim government to the Italian Head of State, Sergio Mantarella. This makes a snap election in Italy the most likely next step. Analysts are predicting that the populist parties will receive even more votes than in the previous election and given their Eurosceptic nature, a populist win could be bad news for the euro.
Political instability in Europe accompanied news that Billionaire investor George Soros is backing a project for a second Brexit referendum within a year. Mr Soros is certain that the costly drawn out Brexit proposed is sufficient to encourage a vast majority to vote in favour of overturning the Brexit vote. Yet instead of boosting the pound, this has added to the lack of clarity whilst highlighting the uncertainties that lie ahead 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.|
The dollar benefited from its “safe haven” status on Tuesday, as investors turned their back on European assets and looked to safety in the US.
Optimism over relations between the US and North Korea was also boosting the dollar in the previous session. Last week President Trump cancelled the meeting between himself and North Korean leader Kim Jong Un. However, since then investors have become increasingly hopeful that the meeting could still go ahead.
On Tuesday a high ranking North Korean official headed for the US as part of the preparations for the Summit between the two nations. An easing of geopolitical tensions between the two nations is helping boost the dollar.
Today attention is likely to return to the US economic calendar as US GDP figures are released. Analysts are expecting the US economy to have grown 2.3% year on year. Strong growth will help lift the dollar.
|Why does strong economic data boost a country’s currency?|
|Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.|
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.