GBP/USD: Pound Lower vs. Dollar As Pressure Mounts On UK PM

The pound managed to move higher versus the dollar on Friday, hitting a peak of US$1.3104. However, this was a case of too little to late and the pound US dollar exchange fell 0.6% across the week. As the new week begins the pair is once again on the back foot.

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 was under pressure as Brexit concerns were remained prominent in the previous week. There were no new developments from either side at the EU Leaders Summit and the Irish border issue remains a key sticking point. However, both The EU and the UK did touch on the prospect of extending the transition period, as a way of giving more time to come up with a solution to the Irish border issue.

The UK Prime Minister Theresa May has found herself in a very dangerous position after she said that she was willing to consider extending the transition period. Her comments infuriated Eurosceptics in the UK Conservative Party. Over the weekend there has been talks of Theresa May facing a leadership challenge and / or a vote of no confidence in the coming weeks. Analysts believe that the increased political uncertainty, in addition to Brexit uncertainty could keep pressure on the pound.

How does political risk have impact on a currency?
Political risk drags on the confidence of consumers and businesses alike, which means both corporations and regular households are then less inclined to spend money. The drop in spending, in turn, slows the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. Signs that a country is politically or economically less stable will result in foreign investors pulling their money out of the country. This means selling out of the local currency, which then increases its supply and, in turn, devalues the money.

Geopolitical Tensions Keep Dollar Supported

The dollar gained in strength across the previous week. Federal Reserve minutes lifted the dollar, as policy makers were clear in their support for continued interest rate hikes. Some policy makers even suggested that hikes needed to go further than initially planned, in order to prevent the US economy from overheating.

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.

The dollar has also been benefiting from its safe haven status, something which analysts expect to continue in the week ahead. As the world’s reserve currency, in times of rising geopolitical tensions and strains, investors tend to move towards the dollar as a safer bet. With worries over Saudi Arabia’s increasingly concerning involvement in the disappearance or journalist Jamal Kashoggi; Italy’s expected clash with Brussels over its spending; Brexit developments going nowhere fast — there are plenty of reasons for investors to continue to look towards the perceived safety of the dollar.

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