GBP/USD: Will US GDP Lift Dollar vs. Pound?

The pound dropped versus the dollar on Thursday. Brexit concerns were once again responsible for the pound dropping 0.5% versus the dollar. The pound US dollar exchange rate hit a low of US$1.3114 before climbing slightly towards the close.

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.

Chief EU Negotiator Michel Barnier raised concerns over the UK and the EU’s ability to reach a Brexit deal by rejecting a central pillar of the UK’s post Brexit trading plan. UK Prime Minister Theresa May’s post Brexit trading plan had proposed that the UK collect taxes and duties of EU products on behalf of the EU. This is something that the EU will not agree to, making Theresa May’s post Brexit trade plan unworkable. This also increases the likelihood that the UK and the EU will not be able to reach a Brexit deal prior to the self-imposed October deadline. Failure to do so would result in a hard Brexit by default.

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.

This week Brexit negotiations have focused on the unresolved issues of avoiding a hard border in Ireland and the post Brexit UK — EU trade plan. There will now be a break in negotiations until mid-August when they will begin again.

With no high impacting data on the UK economic calendar, investors will look towards the BoE rate decision next week and the pmi releases prior to that.

Dollar Rallies Despite Weaker Data

The dollar moved higher on Thursday, despite a slew of economic data that was weaker than what analysts had been expecting. Jobless claims increased, durable goods orders decreased and the trade balance shrunk. Usually weaker than forecast data would send a currency lower.

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.

Instead the dollar was bounding higher after European Central Bank President Draghi confirmed that the ECB would not be raising interest rates until “through next summer”. The news sent the euro lower and given that the dollar often trade inversely to the euro, the dollar rallied. It was also boosted by the knowledge that the Federal Reserve is the only central bank planning a steady path of rate rises.

Today investors will look towards US GDP data. Many analysts are predicting robust growth, possibly the best in years. Should this be the case, the dollar could continue to rally.

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