The pound US dollar exchange rate dipped following words from Bank of England (BoE) Governor Mark Carney, but then surged shortly after,, following weaker US inflation data. The pound US dollar surged across the session, hitting a high of US$1.3121.
|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.
The pound initially dropped versus the US dollar following the Bank of England monetary policy rate announcement. As analysts expected, the central bank kept interest rates on hold. Brexit uncertainties were also clouding the central bank’s outlook. Mark Carney then gave a stark warning over what he viewed the impact of a no deal Brexit would be on the UK economy.
Mark Carney believes that a no deal Brexit will lead to economic chaos, high unemployment and high inflation. Even though a Brexit deal is looking slightly more likely than it did just a few weeks ago, the probability of the UK crashing out of the European Union without a deal is still high enough to unnerve investors. Should the UK leave the EU with a no deal, hard Brexit, the impact, according to Mark Carney, would be disastrous.
|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 Mark Carney is due to speak again. Investors will be watching closely for any further Brexit related negativity.
The dollar was out of favour against its peers in the previous session, as investors digested disappointing inflation figures. US CPI declined by more than what analysts were expecting in August. The rate of inflation grew at 2.7%, down from 2.9% in July as petrol prices at the pumps stabilised and the dollar rallied across the month. A stronger dollar eases inflationary pressures.
The fall in consumer prices comes following a fall in inflation at wholesale level. Weaker inflation usually means that an interest rate rise is less likely. Market participants believe that the US Federal Reserve will rises interest rates this month regardless of the recent inflation figures. However, weaker inflation casts a shadow over a fourth rate rise this year.
Today is a big day for the US dollar with a slew of data due to be released. This includes US retail sales, industrial production and University of Michigan Confidence. Weak data could see the dollar sink.
|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.|
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.