Pound Higher vs. Dollar After UK PM Forces Softer Brexit On Ministers

The pound was extending last week’s gains versus the dollar as trading kicked off at the start of the new week. The pound US dollar exchange rate moved 0.5% higher in the previous week and it was another 0.2% higher in early trade on Sunday evening.

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.

Last week Brexit concerns overshadowed a more confident sounding Bank of England. However, a Brexit breakthrough by UK Prime Minister Theresa May on Friday afternoon lifted the pound at the end of last week; a move which continued when the markets reopened after the weekend. Theresa May has managed to push through her “softer Brexit”, finally uniting her cabinet, including hard-line Brexiteers, in a change of stance towards a softer Brexit, which is considered by economists to be less severe on the UK economy. This new version will call for the UK to remain in the customs union for goods, helping to resolve the Irish border solution. In return the UK will pay due regard to the EU rules over goods.

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 UK government will publish a white paper this week on the evolved proposal. Whilst Theresa May has cleared the first hurdle of pushing it through her own government, this proposal still needs to be accepted by the EU. Any signs that the EU are willing to move negotiations forward with this new proposal could lift the pound further.

Dollar Struggles Following Softer Wage Growth

US trade tariffs begun on Chinese imports to the value of $34 billion dollar. However, the reaction from the dollar was minimal. Instead the dollar fell after the release of the US jobs report, the non-farm payroll. The number of jobs created in June beat analysts’ expectations. However, the dollar declined after the average wage growth figure fell short of city analyst forecasts, increasing 2.7% year on year, short of the 2.8% pencilled in. Whilst this is highly unlikely to knock the Federal Reserve from their current path of rate hikes, when combined with lower sentiment on trade war concerns, it was enough to knock some points off the dollar.

How does the non-farm payroll (NFP) affect the US dollar?
It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the good and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes up the currency’s worth.

Trade war headlines will be the central focus for dollar traders. In the absence of any further developments investors will move their attention towards inflation data due for release later in the week.

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