Pressure mounting on UK Prime Minister Theresa May sent the pound sharply lower on Monday. Meanwhile, the US dollar benefitted as trade war fears increased. The pound US dollar exchange rate tumbled to a low of US$1.3226, as it continues to hover around a six month low.
|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.
Theresa May’s job was looking unstable again on Monday as her government faced yet another defeat in the House of Lords over the Brexit Bill. With less that a year to go until Brexit, there is still a row over what should happen if there is no Brexit deal or if Parliament votes against the deal.
Theresa May had narrow avoided defeat in the House of Commons last week by making concessions over the “meaningful vote”. The House of Lords have taken this one step further insisting that MP’s should have to approve whatever the government decided to do if there was no final deal or if Parliament voted against it. The defeat on the Brexit Bill means that it will be sent back to the House of Commons to be voted on again. May is under pressure from both sides, with some threats of being ousted. The political risk weighed on 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.
Today is once again light for the UK economic calendar meaning that market participants are likely to remain focused on Brexit development, political uncertainty and the Bank of England rate decision on Thursday.
Intensifying trade war concerns boosted the dollar in the previous session. Last week President Trump announced trade tariffs on $50 billion of Chinese imports. China, as promised retaliated with a list of US imports which it too will place trade tariffs on, escalating fears of a trade war.
The escalating trade tensions is supportive of the US dollar and that is because of the dollar’s safe haven qualities. This means in times of geopolitical concerns or trade wars for example, investors will look to protect their investments by converting them into the dollar.
Today is another quiet day with regards to the US calendar with just housing starts and building permits potentially causing volatility in the absence of more trade talk.
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.