GBP/USD: Pound Dives vs Dollar As US Trade Deal Hopes Fade

The pound US dollar exchange rate ended the session more or less where it had started trading on Thursday morning. Yet as trading started in Asia, the pound dived to a low of US$.3171.

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 no UK data releases scheduled on the economic calendar, investors were once again looking towards Brexit. UK Prime Minister Theresa May published her White paper on the post Brexit EU — UK relationship. This was just a fleshing out of the agreement imposed by the Prime Minister on her cabinet last weekend, which resulted in several high-profile resignations. The white paper is a softer version of Brexit, more aligned with the EU than what most Brexit supporters wanted. Whilst this could be good news for UK businesses and therefore the economy, Brexit supporters say it is not what they voted for.

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.

Theresa May still needs the EU to accept her proposal and it seems that they could be taking a softer stance already. Chief negotiator sounded optimistic ahead of reading the white paper. Negotiations will begin next week.

However Trump’s declaration, as he landed on British soil, that the softer Brexit plans “probably kills off” US trade deal hopes sent the pound lower.

Today there is no data to be released for the UK. Therefore, market participants will stay focused on Brexit.

US Inflation Closes In On 3%

The dollar remained subdued on Thursday after rallying hard earlier in the week. Inflation data that was marginally weaker than what analysts had been anticipating also took the shine off the dollar. Inflation as measured by consumer price index, increased by 2.9% year on year in June. However, on a monthly basis inflation increased by 0.1%, slightly lower than the 0.2% forecast by analysts. The slight miss on the monthly print, in addition to a slight miss on average weekly wages growth last Friday, cast a small doubt in the minds of investors over the Fed’s path of future interest rate rises, which weighed on the dollar.

Interest rates.

Today investors will look towards US sentiment data to see whether trade war concerns have started to impact on the US. If so the dollar could come under pressure.

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