GBP/USD: Will Brexit Concerns Pull Pound Lower vs. Dollar?

The pound surged through US$1.32 versus the dollar on Tuesday. The pound US dollar exchange rate hit a high of US$1.3236 on dollar weakness and pound strength. This was the highest level that the pound has traded at versus the dollar since Friday. However, the pair was unable to maintain the highs and fell lower towards the close.

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.

Whilst analysts had been expecting Brexit developments to drive movement in the pound, UK jobs data stole the spotlight. Data showed that UK wages increased at the fastest pace in almost a decade. UK earnings excluding bonuses climbed to 3.1% in the three months to August. Unemployment remained at multi decade lows of 4%.

The strong wage data shows that there are still some bright spots in the UK economy, which is otherwise suffering under Brexit uncertainty. The faster pace of earning growth could encourage the Bank of England to raise interest rates at a quicker pace to prevent inflation from rising too high. Higher interest rate levels make holding sterling more profitable, encouraging investors to buy into the pound.

How does strong jobs data boost the currency?
It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the goods and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.

However, the gains in the pound were capped as Brexit nerves continued to weigh on demand for the currency. A Brexit deal at tomorrow’’s EU Leaders summit is not expected, instead December is starting to look like a more realistic data, if one happens at all.

The rally in the pound could be short lived as investors turn their attention to UK inflation data. Analysts are expecting the consumer price index (CPI) to tick lower to 2.1% in September from 2% in August.

Fed Minutes to Boost the Dollar?

Dollar demand was weak for most of the session on Tuesday. However, investors started buying back into the dollar as the minutes from the Federal Reserve’s latest policy committee meeting moved into focus. The minutes come from the meeting where the Fed hiked interest rates for the third time this year and signalled another hike would be coming before the end of the year. Given the hawkish moves by the Fed at the meeting, analysts are expecting the minutes to show the Fed’s upbeat attitude towards the US economy and more aggressive tone towards tightening monetary policy. Should this be the case, the dollar could rally higher.

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 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.