The pound moved higher versus the dollar, after UK Prime Minister Theresa May announced that she would personally be taking over Brexit negotiations. The pound US dollar exchange rate rose to a match the high of the previous session at US$1.3159.
|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.
News that Theresa May will take full control of the Brexit negotiations going forwards has been well received by investors. The side-lining of her Brexit department, who have often been considered supporters of a hard-line Brexit, has been interpreted as a move towards a softer Brexit. A softer Brexit will keep the UK more in line with the EU and is therefore more business friendly and more supportive for the UK economy and the pound. This move by Theresa May could also reflect the concerns in Downing Street that the clock is ticking closer to the October deadline and so far no Brexit deal is close.
|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 taking control has irked some of the Brexiteer ministers. However, the timing of the announcement was also crucial. Theresa May announced her intentions the day before ministers start their six-week summer break. This means that political risk should ease substantially as Theresa May has managed to cling onto power.
Today there is no high impacting data, so investors will once again look towards Brexit headlines for clues on direction.
The dollar was out of favour following weaker than forecast service sector activity data. The US service sector pmi fell to 56.3 in July, down from 56.5 in June. Whilst the growth is still strong, this was the slowest rate of expansion since April, which unnerved investors.
|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.
Today trade war concerns will be front and central on investors radar, as the head of the EU Commission, Jean-Claude Juncker lands in Washington to hold trade talks with President Donald Trump. Comments from Trump so far fall somewhere between an offer and a threat, with more tariffs promised if a fair deal can’t be worked out with the US.
The dollar continues to be volatile to trade tensions. Therefore, headline from this meeting are expected to have a big impact on the dollar.
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