GBP/USD: Pound Recovers vs Dollar On Renewed Brexit Optimism

The pound fell sharply against the dollar in early trade on Monday before clawing back some of the losses later on in the session. Whilst Brexit fears kept the pound out of favour, optimism over the health of the US economy lifted the dollar. The pound US dollar exchange rate fell to a low of US$1.3028 before climbing back towards US$1.31.

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’s sensitivity to Brexit headlines was clear on Monday. Concerns that UK Prime Minister was dragging her feet over Brexit pulled the pound lower at the start of the previous session. Positive comments from Brussels at the end of last week that a Brexit deal was close lifted the pound. Yet Theresa May’s office criticising the EU for being too optimistic over the chances of a deal sent sterling lower.

The pound was able to recover as Theresa May said that she was prepared the make concessions to Brussels on the Irish border. However, in return she would be looking for no barriers to trade from the EU. This a something that the EU have so far appeared unwilling to do give to the UK. The talks are now entering their final stagers and the two sides will continue to try to clear the way for a positive European Council on Wednesday and Thursday next week. Signs that Theresa May is willing to make concessions boosted optimism that a deal is still a possibility, despite her earlier negativity. The pound rallied on hopes of an orderly, softer Brexit.

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 headlines will continue to be a central focus for pound traders today.

Robust US Economy Keeps Dollar Buoyant

The mood for the dollar remained strong in the previous session after a solid performance last week. Recent economic data has shown that the US economy is hot and firing on all cylinders. Sectors across the board have been showing a relentless improvement in optimism towards business conditions and economic outlook. Market participants and analysts believe that the Federal Reserve will raise interest rates at a faster pace in an attempt to cool the US economy. Expectations of higher interest rates is sending the dollar higher.

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.

Today there is no fresh US data due. In the absence of any trade tension headlines, analysts expect dollar traders to remain upbeat.

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