Brexit fears, weak UK manufacturing data and continued trade war fears sent the pound US dollar exchange rate to a low of US$1.2800. The strong dollar and weaker pound wiped out all the gains that the pair had made in the previous week.
|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 started trading this week in negative territory, after a clash between EU Chief Negotiator Michel Barnier and UK Prime Minister Theresa May. Michel Barnier’s strong opposition to Theresa May’s Brexit plan combined with Theresa May’s refusal to budge on the plan suggests that Brexit talks could very quickly hit a stalemate once again. This would make a Brexit deal before the October deadline increasingly unlikely.
|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.|
The pound then extended its losses against the dollar, on the release of UK manufacturing data. Analysts had expected manufacturing activity to have remained constant in August at 53.9. However, activity unexpectedly slowed to 52.8, its slowest level of growth in 25 months. The sudden slow down was due to a sharp decline in export orders as current global trade tensions impact on global economies slowing the pace of global growth and therefore demand. The weaker than expected data sent sterling lower vs. the dollar.
|Why does poor economic data drag on a country’s currency?|
|Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.|
Today investors will look towards construction activity. The construction Purchasing Managers’ Index (PMI) is expected to have slowed in August to 54.9 after July’s strong reading of 55.8. Another disappointing figure could send the pound lower again. Market participants will also look towards a speech by Bank of England Governor Mark Carney. Any discussion over future monetary policy could create volatility.
The dollar gained ground versus the pound in the previous session, as trade war fears continued to dampen sentiment. In times of increased geopolitical tensions, such as trade wars, investors look to buy into the dollar for its safe haven properties. As it is a bank reserve currency, it is considered safer than some other currencies. With tensions between China and the US escalating, the dollar has benefitted.
Today, attention will turn back towards the economic calendar with investors watching US manufacturing data to see whether the trade spat has hit the US manufacturing sector, as it has the Chinese.
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 TransferWise.com 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.