GBP/USD: Low UK Data & Trade War Fears Lowers Pound vs Dollar

The pound managed to end trading on Tuesday at roughly the same level that it started at US$1.3258. However, moving into Wednesday, trade tensions returned pushing the dollar higher versus the pound.

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 political scene had calmed down on Tuesday. UK Prime Minister Theresa May had weathered the storm and had kept her job at the helm. There was even a softening of tone from German Chancellor Angela Merkel and chief EU negotiator Michel Barnier, who both sounded confident that Brexit talks would now be able to progress quickly. This news would normally boost the pound, given that a no deal, hard Brexit appears to be less likely. However, there is a certain amount of nervousness which is keeping the pound capped.

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.

Investors also digested a barrage of UK economic data, which leaned towards disappointing. The UK industrial and manufacturing production numbers came in below what analysts had been expecting. This overshadowed news that the UK GDP was in line with forecasts at 0.3%. Industrial production grew just 0.8% year on year in May, well below April’s 1.6% growth and below analysts’ expectations o f 1.8%. Manufacturing production was also lacklustre at just 1.1%, significantly short of the 1.9% analysts had pencilled in. Both figures showed that the sectors were not recovering from an earlier slowdown as quickly as hoped.

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

Trade War Escalates

The dollar was relatively subdued for much of the previous session, until President Trump took another step to intensify the trade war with China. The White House announced that the US would impose trade tariffs on a further $200 billion worth of Chinese imports in a clear escalation of tensions between the two powers. Market participants reacted to the news by buying into the dollar for its safe haven properties. So there has not been a response from China and the reaction of investors has been relatively muted.

Whilst there is plenty of data being released from the US today, none of it is high impacting. Therefore, investor attention could remain firmly on trade war developments.

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