GBP/USD: Brexit & Geopolitics To Drive Pound vs Dollar

The pound charged higher versus the dollar in early trade on Thursday. The pound US dollar exchange rate reached a peak of US$1.2754. However, it was unable to maintain strength and slipped toward US$1.2710 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.

The pound rallied early on in the previous session as investors digested strong retail sales data. Thanks to England progressing in the world cup, warmer weather and summer discounts retail sales unexpectedly surged. Retail sales in July jumped 3.5% year on year, well above the 2.7% analysts had forecast. On a monthly basis sales increased 0.9%, significantly higher than the -0.6% decline in June. The solid rebound in spending lifted the pound. However, retail sales figures are notoriously volatile and with wage growth remaining sluggish and prices still elevated the outlook for consumers remains challenging.

With no high impacting economic data to digest, Brexit will remain at the forefront of investors minds as the next round of talks continue. The pound is likely to stay under pressure as fears of a no deal Brexit increase. Rating agency Fitch yesterday confirmed that they would no longer be considering a smooth orderly Brexit the base case scenario. Instead they see that the possibility of a disorderly hard Brexit has grown materially, which will keep demand for the pound weak.

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.

Easing Geopolitical Tensions Bring Dollar Lower

Demand for the dollar softened in the previous session, after the greenback hit a 14-month high versus the pound earlier in the week. Geopolitical tensions eased slightly on Thursday allowing the dollar to drop back as investors no longer searched for the safe haven of the dollar.

Qatar has stepped in to offer financial support to Turkey, further lifting the lira and easing fears of contagion across other financial systems. China has also agreed to send a trade delegation to Washington in the hope of reaching a trade deal. Whilst there are no senior figures going, investors are seeing this as a step in the right direction to ease trade tensions.

Today investors will continue watching developments on the geopolitical stage. Sentiment data from the University of Michigan will also be in focus.

This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Inc., Currency Live or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. Consult our risk warning page for more details.

This article was initially published on from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.