Pound Spikes & Retreats vs. Dollar After False Brexit Optimism

After falling for 5 straight sessions, the pound finally moved higher versus the dollar on Wednesday. The pound US dollar exchange rate spiked to US$1.2982, its highest level in 4 sessions, before easing slightly 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 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 following two pieces of news. Firstly, UK service sector data was solid. Activity in the UK service sector expanded by more than what analysts had been expecting in August. The service Purchasing Managers’ Index (PMI) jumped to 54.3 in August, up from 53.5 in July and ahead of the 53.9 that analysts had pencilled in. These figures were well received news after manufacturing and construction activity data in August disappointed.

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.

The pound also spiked higher on Brexit optimism. Reports that Germany was willing to drop some key Brexit demands increased investor hopes that the UK will achieve a Brexit deal. Any signs that the UK might not crash out of the EU without a deal has lifted the pound in recent weeks. However, the pound was unable to stay at the elevated levels; reports quickly surfaced that this wasn’t the case and Germany was not prepared to drop key Brexit demands.

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.

Today there is no high impacting UK data, Brexit headlines will continue to move the pound.

Trade Tensions in Focus

The dollar traded broadly lower in the previous session, despite trade tensions still running high. Today sees the end of the consultation period for President Trump’s additional tariffs on a further $200 billion of Chinese imports. This comes as Trump announced that trade talks are going well, although the US is not prepared to make a deal along the lines that China was after. Trump insisted that hey would continue talks with China but that they were not in a position to agree on a deal. The dollar usually rallies in times of increased geopolitical tension thanks to its safe haven status.

Today not only will trade tensions remain in focus, but economic data will also be under the spotlight with the release of initial jobless claims and nonmanufacturing data ahead of the US jobs report on Friday.

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