GBP/USD: Pound At 14 Month Low vs. Dollar Amidst Brexit Fears

The pound continued to fall versus the US dollar in the previous week. The pound US dollar exchange rate dropped a further 1.8%, making it the fifth consecutive week of losses for the pound US dollar pair. The pound US dollar hit a low of US$1.2723 last week, its lowest level since June last year. The pair has started the new week once again on the back foot.

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 fell across the previous week as fears grow over a hard, no deal Brexit. Investors are growing increasingly nervous that Britain will crash out of the European Union without a Brexit deal in place. Economists and business leaders have frequently expressed their concerns over the impact that a hard, no deal Brexit could have on the economy. As concerns increased over a hard Brexit, the pound fell.

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.

Not even signs of a faster growing UK economy were enough to lift the pound. UK GDP showed that the British economy grew 0.4% quarter on quarter, up from 0.2% in the previous quarter. This data supports the Bank of England’s theory that the UK economy will pick up in the second quarter after a slowdown in economic growth in the first quarter of the year. Usually strong data would boot the pound higher; however, the dollar was noticeably stronger on Friday.

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.

Dollar Rallies on Safe Haven Status

The US dollar appreciated in value on Friday and as trading started on Sunday evening. As concerns over the escalating problems in Turkey increased risk aversion among investors was also on the up. The dollar benefited from its safe haven status, which means that when geopolitical tensions rise, investors will usually look to buy into the dollar thanks to its status as the world’s reserve currency.

On Friday US President Trump announced measures to double the US tariffs on Turkish imports in response to Turkey’s refusal to free a political prisoner. This, in additional to internal economic issues, sent the Turkish Lira 20% lower. Market participants’ fears of contagion into the European financial system increased, boosting the desirability of the safer dollar.

There is no high impacting US data today, leaving investors to focus on developments in Turkey.

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