GBP/USD: Pound rallies v/s dollar as Barnier hints at Brexit deal

The pound hit 1.2980 against the dollar in Wednesday’s trade, bringing it within touching distance of the psychological 1.3000 barrier. During Asian trade the GBP/USD rate broke through to 1.3032, as investors reacted to the surprise announcement of a potential Brexit deal.

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 USDHere, £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 GBPIn 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.

This rally in sterling’s value comes after a breakthrough appeared to be made in the Brexit negotiations, with EU Chief Negotiator Michel Barnier saying the EU would be prepared to offer the UK a partnership after Brexit.

After months of deadlocked talks, Barnier announced that the EU would be able to offer post Brexit UK a deal "such as has never been with any other third country.” Although Barnier took a firm line on speculation of the UK remaining in the Single Market, the concession caused a marked reaction among investors who are hoping for a smooth Brexit.

Why is a smooth Brexit good for the pound?
A smoother Brexit would be a scenario in which the economic consequences of leaving the European Union are minimised. This is favourable for the pound because the less the Brexit impact on the economy, the more likely that foreign investors will remain interested in the UK. Foreign investors need sterling to invest in the country and so the more GBP is purchased, the higher the demand and, thus, an increase in the currency’s value.

During Thursday, sterling traders will be looking for further comment on the Brexit negotiations, including UK government reaction. British Net Lending to Individuals figures are also due out – although any further Brexit developments are likely to eclipse the importance of this data for investors.

The dollar did well in Wednesday’s trade against most currencies, as it became evident that the threat of global trade wars has not completely faded. Investors had previously been pulling safe haven bets on the dollar after President Trump announced progress in a trade deal with Mexico.

Investors in the US welcomed yesterday’s Q2 GDP figures, which showed a 4.2% annualised growth, slightly up on the previous figures of 4.1%. This positive economic news means that investors widely expect a rate hike to be announced by the Fed next month. Odds of a further interest rise in September have been estimated at as high as 96% by analysts, with the chances of a further hike in November currently sat at 70%. Interest rate rises are good news for investors and likely to boost market sentiment.

Why do raised interest rates boost a currency’s value?
Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.

Investors in the US today will be anticipating figures on Personal Spending and Unemployment Claims. However, any further development on trade talks would be likely to have an impact on the price of the dollar, regardless of these data releases.

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