After Brexit fears sent the pound sinking lower versus the dollar at the end of last week, Brexit optimism boosted the pound versus the greenback on Monday. The pound US dollar exchange rate hit a high of US$1.3167, before easing back towards the close. This still remains some way off last week’s 2 months high of US$1.3299.
|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 little in the way of economic data to grab the attention of pound traders, Brexit developments were once again the biggest driving force behind movement in the pound. Whilst Theresa May’s Chequers plan has been torn apart by all sides involved, she continues to stick with the plan. UK Brexit Secretary Dominic Raab confirming that Theresa May’s government had a good cabinet meeting today and that he believed that a good Brexit deal could be secured, offered some optimism that the UK was still working hard to achieve a deal with the EU.
The alternative would be crashing out of the EU without a Brexit deal, which many business leaders and economists consider would be detrimental to the UK economy. Brexit optimism helped lift 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.|
There is no high impacting economic today meaning that Brexit headlines will once again be the driving force behind the pound’s movements.
The dollar dipped in early trade only to recover later on in Monday’s session. The dollar initially moved lower despite investors expecting the Federal Reserve to raise interest rates on Wednesday. This is because Investors are growing increasingly concerned that the Federal Reserve will slow the pace at which they will raise interest rates going forward.
|Why do raised interest rates boost a currency’s value?|
|Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.|
The dollar found strength later in the session after reports circulated that Deputy Attorney General Rosenstein is about to step down. Having such a high-level official resign is not the sort of stability within an administration that the markets want to see. Furthermore, Rosenstein’s resignation is unlikely to help Trump and the republicans in the midterm elections in November. These domestic instability fears, plus the fact the Chinese have declined an offer for further trade talks have boosted the safe haven appeal of the dollar.
Today investors will be watching the release of US consumer confidence data. A print which beats analysts’ expectations could see the dollar rise further.
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