GBP/USD: Pound Soars vs. Dollar As EU On Brink Of A Brexit Deal

The pound US dollar exchange rate experienced a high level of volatility on Thursday. After rollercoasting through the session, the exchange rate ended higher. The pair climbed to a peak of US$1.3247. This is the highest that the pair has traded at in almost three months.

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 = 1.13990 EUR

Here, £1 is equivalent to approximately €1.14. This specifically measures the pound’s worth against the euro. If the euro amount increases in this pairing, it’s positive for the pound.

Or, if you were looking at it the other way around: 1 EUR = 0.87271 GBP

In this example, €1 is equivalent to approximately £0.87. This measures the euro’s worth versus the British pound. If the sterling number gets larger, it’s good news for the euro.

The pound experienced strong movements in the previous session as Brexit headlines sent the currency lurching from highs to lows and back again. UK Prime Minister Theresa May gathered her cabinet to inform them that a historic Brexit deal was close. At the same time, she faced a backlash from Eurosceptics who believe the deal could see Britain forever tied in to a customs union with the EU.

Meanwhile, the Irish Democratic Unionist Party (DUP), has threatened to topple the government if Theresa May crosses their red line over Brexit. Whilst the DUP has only 10 MP’s, Theresa May is dependent on them to prop up her government. The DUP are adamant that there are no checks between Northern Ireland and mainland Britain. However, Theresa May appears willing for those checks to go ahead I order to prevent checks at the Irish border.

Should the DUP flex their muscles, they threaten U.K. domestic political stability and possibly Brexit deal being achieved. Pound traders have shrugged off these concerns and are focusing on the increased possibility of a deal, boosting 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 speculation increasing that the UK is on the brink of a deal, Brexit headlines will remain a central focus today.

US Inflation Disappoints Pulling Dollar Lower

The dollar sunk lower again on Thursday in its fourth consecutive losing session. Inflation data printing lower than what analysts had been predicting hit demand for the greenback. Analysts had been expecting core inflation, which excludes more volatile items such as food and fuel, to increase to 2.3%. Instead it remained constant at 2.2%. Inflation including fuel and food dropped from 2.7% in August to 2.3% in September. The tick lower in inflation eased investor concerns that the US economy was overheating. Consequently, interest rate expectations eased, and the dollar plunged.

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 the only US data is import prices. These could serve to bring investors’ attention back towards trade tension.

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