GBP/USD: Will Pound Rally Higher vs Dollar On Brexit Optimism?

The pound fell 0.3% lower versus the dollar on Friday, however this was insufficient to knock the pound US dollar weekly rally off course. The paid gained 1.1% across the previous week, hitting a six-week high of US$1.3143.

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 was in demand during the previous week thanks to UK jobs data, wages figures and GDP all printing better than what analysts had been forecasting. Furthermore, a lack of negative Brexit headlines also lifted sterling.

As Brexit discussions continued last week, there was growing evidence of a more amenable approach from Brussels. With both sides now apparently willing to make concessions, signals are increasingly positive. This is leading investors to believe that there is a growing possibility that a Brexit deal could be achieved, even as the deadline to a deal is fast approaching. Economists are clear that they believe that a hard, no deal Brexit will be the worst possible outcome for the pound; therefore any sign of a Brexit deal boosts 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.

With no high impact UK economic data due for release today, investors will be paying particular attention to Brexit talks, again. There remain several key issues which need to be resolved in order for a Brexit deal to be achieved. One of these is the Irish border issue. Over the weekend, reports surfaced that the EU could be willing to consider a softer stance, once again signalling their increasing desire for a deal to be achieved.

Dollar Boosted By Fed Hiking Prospects & Renewed Trade Tensions

The dollar eased back across the majority of last week, before surging on Friday. The dollar had lost ground across the previous week after demand for emerging market currencies stabilised, following its recent selloff and as a soft inflation print caught investors off guard.

However, on Friday, a ramping up of trade war words and increased expectations of a Fed rate hike pushed the dollar northwards. By the end of the week investors were 77% sure that the Fed were going to raise interest rates once more in addition to a September hike. This was up from 66% earlier in the week.

Today empire manufacturing data will be released which could cause some volatility for the dollar.

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