The pound hit fresh yearly low versus the US dollar on Thursday, as the dollar received a boost from encouraging comments from the Federal Reserve. The pound, on the other hand, continued to struggle under the pressure of Brexit. The pound US dollar exchange rate hit a low of US$1.28221.
|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 has fallen for nine straight sessions as Brexit fears continue to unnerve investors. Comments from Bank of England Governor Mark Carney and International Trade Secretary Liam Fox have increased concerns that the UK will crash out of the European Union without a deal.
Economist and business leaders have frequently expressed their concerns of a no deal Brexit being the worst option for the UK economy and therefore the pound. As fears increase of a no deal hard Brexit, the value of the pound decreases.
|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.
Today investor will look towards the UK GDP data release for clues about the health of the UK economy. Investors will be keen to see that the slowdown of the first quarters has not transferred across to the second quarter. Analysts are expecting second quarter economic growth to be 1.3% year in year, up from 1.2%. On a quarterly basis, analysts are predicting economic growth of 0.4%, up from 0.2%. Should the second quarter show an increase in pace of growth, the pound could move 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.
The dollar rallied across the board on Thursday after encouraging comments from Federal Reserve policymaker Evans. The usually cautious Evans, said that one or two more rate hikes this year as reasonable, signalling that the US economy continues to go from strength to strength. The fact that Evans is usually so cautious and has had an apparent shift in outlook, caught the attention of dollar investors and pushed the pound higher.
Today investors will be looking at US inflation data. Analysts are expecting inflation in the US to remain constant at 2.3% in July. This would be above the Fed’s 2% target indicating that another rate rise or two is on the way.
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