Despite a move lower for the pound in early trade on Tuesday, sterling then charged higher to its highest level versus the dollar this month. The pound US dollar exchange rate hit a high of US$1.3148, a level last reached at the end of September.
|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
Media speculation that Brexit divorce terms could be arranged as soon Monday boosted the pound in the previous session. The rumours still haven’t been confirmed. Regardless, they were sufficient to lift the spirits of pound traders, who are extremely sensitive to any Brexit developments. Business leaders and economists have frequently expressed the damage that they believe a disorderly, no deal Brexit could do to the economy. As if in cue German business leaders also joined the chorus on Tuesday, warning that a no deal Brexit would be a disaster on both sides of the channel, but more so to the UK.
|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.|
The UK economic calendar has been quiet for the first part of the week. Today this looks set to change with a slew of UK data due to be released. Analysts are expecting manufacturing and industrial production to have picked up marginally in September. However, city analysts are also expecting a slight slowdown in UK economic growth, with the GDP forecast t o dip to 0.1% in August month on month, down from 0.3%. A weak reading could drag the pound lower.
|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.|
The dollar started the previous session on a strong note. However, as the session progressed the US dollar grinded lower. There was no high impacting US economic data or any eye-catching headlines that sent the dollar lower. The dollar was left to trade at the will of the pound and given the increased demand for the pound the dollar came under pressure
Today the most influential release on the US economic calendar will be the producer price index (PPI). This will give investors a look into the level of inflation at wholesale level. Analysts are expecting PPI to have increased 0.2% month on month in September up from a drop of -0.1% in August. Recent data has show that the US economy is performing extremely well. Therefore, even if the PPI reading did disappoint, it is unlikely to have too much of an impact on the dollar.
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.