GBP/USD: Pound Remains Near 11 Month Low vs. Dollar

The pound US dollar exchange rate ended Tuesday more or less at the same level that it started to trade. The pound US dollar exchange rate closed at US$1.2940, close to its 11-month low, hit at the start of the week.

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 moved higher in early trade as investor cheered encouraging housing data. The Halifax house price survey showed that house prices in July increase 1.4% on a monthly basis, well ahead of the 0.2% increase analysts had been expecting. On a annual basis, house prices increased 3.3%, more than the 2.7% analyst had pencilled in. Higher house prices are a sign of a more robust housing market, more confident consumer and a generally stronger economy. The impressive figures sent the pound higher.

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.

However, the pound wasn’t able to retain the strength and slowly fell lower, as Brexit fears returned to haunt market participants. With no further high impacting data until the end of the week, market participants were once again weighing up the probability of a hard, no deal Brexit. With politicians increasingly pointing to no deal being agreed before the October deadline, the pound is under considerable pressure.

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.

Trump Makes More Trade Threats

As President Trump fanned concerns over global trade wars, the US dollar moved higher. On the day that the US re-imposed trade sanctions against Iran, Trump said that those countries doing trade with Iran, will not be doing trade with the US. This is a threat that most countries will not want to take the risk on and could potentially disrupt world trade. The dollar benefited from its safe haven status, whereby investors look to buy into the dollar in times of increased geopolitical tension.

Today there is little in the way of high impacting US economic data. This means that US dollar investors will be watching any US trade war developments closely. With trade tensions continuing with many countries including, China, the dollar is sensitive to any new headlines.

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