Pound weakness owing to Brexit jitters, in addition to falling demand for the US dollar as trade war fears intensify, left the pound US dollar exchange rate more or less flat on Monday. The exchange rate traded within a narrow range hitting a peak of US$1.3290 and a low of US$1.2322.
|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 little in the way of high impacting UK data, investors continue to dwell on Brexit developments, or the lack thereof. With the EU Summit beginning on Thursday, market participants are not expecting many developments after UK Prime Minister announced that Britain’s Brexit demands will now not be ready until after the summit. With the clock ticking until the October deadline, a no deal Brexit is looking increasingly likely.
This comes as scores of business leaders threaten to withdraw from the UK should there be a no deal Brexit. Last week Airbus said that it would withdraw on a no deal Brexit, on Monday BMW expressed similar plans. The level of uncertainty on a no deal Brexit is too great for many businesses. This would make for a hard Brexit which would the most business unfriendly and therefore the worst option for the UK economy and 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.|
With no high impacting UK data due for release today, Brexit jitters will continue to drive price action in the pound.
Intensifying trade war concerns started to send the dollar southwards in the previous session. Up until now the dollar has been rising as trade war fears pick up. This has been due to its safe haven status, whereby investors look to buy into the dollar in times of global tensions.
However, the reality is that any US trade war will have a deeply negative impact on the US economy. This is turn makes the US dollar less appealing. As Harley-Davidson an iconic US company announced plans to shift production from the US in light of the trade war, the dollar dropped lower.
Today traders will look towards US consumer confidence figures, which may offer the dollar an opportunity to claw back some of the losses from the previous session. Consumer confidence hit an all-time high in April, as Americans were optimistic about their finances and the jobs market. Investors will be looking for ant signs that the impending trade war is impacting on consumer optimism; under such circumstances the dollar could fall further.
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.