GBP/USD: US PMI's To Drive Pound vs US Dollar on Tuesday

The pound steadily fell versus the dollar on Monday. Brexit woes weighed on the pound, whilst the US dollar pushed higher, sending the pound US dollar exchange rate to a low of US$1.3083.

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 influential UK economic data on the calendar to distract traders, the focus was primarily on Brexit in the previous session. The EU rejected UK Prime Minister’s post Brexit plan for Financial Services in yet another blow to chances of agreeing a Brexit deal. New UK foreign secretary, Jeremy Hunt, gave a warning to the EU that the UK is drifting towards a no deal Brexit because the EU are not prepared to make some concessions. The UK stepping up its preparations for a hard, no deal Brexit is unnerving pound investors.

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.

A speech by Bank of England (BoE) policy maker Ben Broadbent also weighed on the pound in the afternoon. Ben Broadbent said that he had not yet decided whether he would vote for a rate rise when the BoE meets for the rate decision. Pound traders were expecting a more encouraging response towards hiking rates and as a result the pound continued to fall.

Today, once again there is little to distract investors on the economic calendar meaning that Brexit headlines will remain in focus.

Geopolitical Tension Lifts Dollar

The dollar charged higher on Monday clawing back some of its losses from the end of last week. As fears of a currency war eased, geopolitical concerns increased. President Trump was once again active on Twitter, this time threatening Iranian President Hassan Rouhani. As the hot-headed rhetoric picked up so did the value of the dollar, which tends to increase in value in times of increased geopolitical risk.

In the absence of increasing trade tension headlines or heightened geopolitical tension, investors will focus on US purchasing managers index (pmi) data, which analysts are expecting to show that the US economy is continuing to perform well, despite the developing trade friction. So far these trade tensions are not impacting on industry or services in the US. Strong pmi prints could see the dollar continue to rally.

Why does strong economic data boost a country’s currency?
Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.

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