The pound dropped sharply against the dollar as traded started for the new week. After reaching a low of US$1.3085, the pair then grinded higher across the session, supported by a weakening dollar.
|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.
An impasse over the Irish border issue has brought Brexit talks to a standstill. Talks over the weekend went badly, with UK Prime Minister Theresa May now trying to disengage. Brussels have given Theresa May 24 hours to try to drum up support from her cabinet over a Brexit deal. However, the prospects don’t look promising.
Northern Ireland’s DUP party, which props up Theresa May’s government is threatening to topple the PM if she goes ahead and agrees to the region remaining in the EU single market. This would create the need for a regulatory check in the Irish sea during the backstop period, crossing the DUP’s red line. Should there be any signs over the next 24 hours that Theresa May has the support of her party then the pound could jump sharply. However, the reality is that a disorderly no deal Brexit is looking increasingly more likely.
|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.|
Today there is high impacting UK data in the form of unemployment and wage growth figures. These would usually attract significant market attention. However, today Brexit developments are likely to control the direction of the pound.
Concerns over the Federal Reserve having to quickly speed up their path of interest rate hikes eased again in the previous session. US retail sales grew more slowly than analysts had been expecting at just 0.1%, instead of the 0.6% analysts had pencilled in. This is important because retail sales are considered a future indication of inflation. Slower growth in retail sales indicates slower growth in inflation. This comes after Friday’s weaker than forecast inflation reading. When inflation is softer the central bank are less concerned about raising interest rate.
|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 focus will remain with the US economic calendar. Analysts are expecting Industrial production and manufacturing data to remain more or less constant in September. Any further disappointments could see the dollar drop lower.
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.