GBP/USD: US Trade Sanction To Boost Dollar vs. Pound?

The pound moved higher versus the dollar on Friday after falling in early trade. However, the 0.2% gain was insufficient to propel the pound into positive territory versus the dollar across the week. The pound US dollar exchange rate closed the week at US$1.3236, down 0.4%.

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 pound fell early on Friday as investors reacted to comments by President Trump. Trump reportedly said that there was little chance of a trade deal between the US and the UK, should Theresa May continue with the softer Brexit stance that she was now perusing. By the afternoon, the pound was climbing higher, regaining lost ground, as Trump claimed this was fake news. He said he supported the UK whatever Brexit stance they took and even suggested the UK sued the EU.

A good relationship and trade deals with the US would soften the blow for the UK separating from the EU and would support the UK economy. Therefore, as optimism returned the pound moved higher.

Trump’s comments come at a time when UK Prime Minister is struggling to hold onto power. After Theresa May imposed a softer Brexit on her party, two high profile ministers resigned. Whilst there has been no direct attack on her power, pound traders are nervous that it will happen soon. Especially as her Conservative popularity has now slipped behind Labour.

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.

The start of the week is quiet on the UK economic calendar. As a result, investors will continue to watch any Brexit developments closely.

US Sentiment Slips On Trade Fears

The dollar weakened on Friday, after US economic sentiment data showed that confidence was falling. The US economic sentiment indicator dropped to a six-month low at the beginning of July, amid growing fears regarding President Trump’s trade battles. The University of Michigan confidence fell to 97.1 in July, from 98.2 in June. Consumers expect the developing trade spats to impact negatively on the domestic economy. The weaker data weighed on demand for the dollar.

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.

With the US pressing for more sanction on EU companies operating in Iran, trade tension will continue to be a central focus on Monday. Investors will also focus their attention on US retail sales. Retail sales give a clue as to inflation levels later down the road. Since higher inflation increases the chance of a rate rise, strong number in retail sales could lift the dollar, by boosting hopes of a more aggressive Federal Reserve.

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