GBP/USD: Brexit Fears To Drag Pound Lower vs. Dollar?

Whilst the pound dropped 0.4% versus the dollar on Friday, it still managed to gain over 0.9% versus the greenback across the week. The pound US dollar exchange rate rallied from a low of US$1.2830 to a weekly high of US$1.3046.

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.

The pound was in favour across most of the previous week as optimism over a strong Brexit deal increased. Investors became increasingly optimistic that the UK was going to be able to achieve a deal that was unprecedented for a non- EU nation. A tailor made, soft deal would be the best outcome for UK businesses and therefore the pound.

Whilst there are a few data points of interest this week, Brexit remains the biggest influencer for the pound. The pound could be out of favour as Eurosceptic ministers return from their summer break.

Former UK Brexit Secretary David Davis increased pressure on UK Prime Minister Theresa May over the weekend, saying that he will vote against the PM’s Brexit proposal; a proposal that he considers is worse than remaining in the EU. Should David Davis vote against the Brexit proposal, this raises the possibility of a parliamentary defeat for Theresa May, which could result in a no deal Brexit by default, bad news for the pound.

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.

In addition to the Eurosceptic ministers returning, German business leaders have also been raising the alarm over the extremely sluggish progress in Brexit talks, which could mean that a deal is never achieved before the October deadline.

Trade War Fears Boost Dollar

Geopolitical and trade war concerns increased towards the end of last week. As a result, investors looked towards the US dollar for its safe haven status. Whilst some economists have expressed concerns that Trump’s protectionist policies could damage the US economy, this isn’t proving to be the case right now. Recent data for the US economy has been strong, indicating that so far, the impact of the trade war has been limited. This has boosted the US dollar safe haven appeal.

Today is expected to be a quiet day for the dollar, given the US public holiday. However, with high impacting data on Tuesday and the US jobs report on Friday, the dollar could see some volatility.

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.