GBP/USD: Pound Rises vs Dollar Despite IMF Brexit Warning

The pound shrugged off Brexit fears, rallying to a six-week high versus the US dollar. The pound US dollar exchange rate hit a high of US$1.3165.

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.

Pound traders paid little attention to a warning from the International Monetary Fund (IMF) that a disorderly Brexit could put the UK into recession. Christine Lagarde, head of the IMF said that a disorderly Brexit would see the UK economy rapidly contract. Whilst the IMF currently forecast economic growth of 1.5% for the UK in 2019, this is based on a smooth Brexit. Should the UK leave with a no deal, hard Brexit then the chances of a recession are high. The view from the IMF supports the general view that a hard, no deal Brexit will be a worst-case scenario for the UK economy and therefore 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.

Chancellor Philip Hammond was quick to endorse the findings by the IMF. The challenges the stance taken by the UK Prime Minister Theresa May who believes that the UK will succeed no matter what type of Brexit, orderly or disorderly, is achieved. A position she is taking strongly as she attempts to convince Brussels that she is willing to walk away from a deal if necessary.

Today, with no high impacting data, any Brexit headlines will remain very much in focus with potential to move sterling.

Trade Tension Keep Dollar Low

The dollar was under pressure in the previous session as trade war fears dominated. Investors traded cautiously across the day as market participants were expecting an announcement by the White House regarding further trade tariffs, overnight. 10% tariffs were set to be announced by Trump, on a further $200 billion worth of Chinese imports. These will then increase to 25% next year if no deal is reached. The Chinese have promised to retaliate.

These latest threats are coming despite trade talks taking place between the US and China. This suggests that there is still a lot of wok to be done before any form of trade truce could be on the cards.

Today, the US economic calendar is light, so investors will remain focused on trade talks.

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