The pound US dollar exchange rate experienced a volatile session on Friday on Brexit news, US jobs data and President Trump hinting towards more trade tariffs on China. The pound US dollar pair rallied to a high of US$1.3028, before sinking to a low of US$1.2908.
|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.
With no high impacting economic data on the calendar at the end of last week, the focus was squarely on Brexit. Chief EU negotiator Michel Barnier saying that we should try to de dramatize the Irish backstop question was taken in positive light by investors. His comments boosted optimism that Barnier’s approach might be softening as the October Brexit deal deadline looms.
Brexit will remain very much in focus as the new week kicks off, with reports circulating that the EU are ready to give Mr Barnier the mandate to close the Brexit deal. This would be a reconciliatory step, offering an olive branch to UK Prime Minister at a time when she is under heavy pressure from the hard-line Brexiteers in her own party. Theresa May will be looking for a helping hand, particularly after a full-on attack from ex- Foreign Secretary Boris Johnson over the weekend.
|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.
Brexit aside, investors will also be paying close attention to UK GDP data which is due to be released today. Analysts are expecting economic growth in the UK to have increased 0.1% in July, keeping the 3-month reading at 0.4%. Any signs of additional strength could boost the pound higher.
Strong US jobs data sent the dollar firmly higher on Friday. 201,000 new jobs were created in August, some 10,000 more than what analysts were forecasting. However, the big change came from average wages which suddenly jumped to 0.4% growth month on month, or 2.9% year on year, up from 2.7% the previous month. Strong wage growth tends to indicate a pick up in inflation down the line, which usually means more interest rate rises, which lifted the dollar.
|How does the non-farm payroll (NFP) affect the US dollar?
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the good and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes up the currency’s worth.
Trade wars will remain in focus moving into the new week, after President Trump hinted on Friday, that the next round of tariffs on Chinese imports could come into effect very soon. In times of increased geopolitical tensions investors will look towards the dollar for its “safer” status. With no signs of the trade tensions easing, the dollar could remain supported by these new threats.
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