GBP/USD: Promising News On Irish Backstop Lifts Pound vs. Dollar

Brexit optimism overshadowed disappointing UK economic data lifting the pound versus the US dollar. The pound US dollar exchange rate pushed northwards regaining some of Monday’s heavy losses. The pound closed Tuesday’s session 0.1% higher at US$1.2986.

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.

Data from the Confederation of British Industry (CBI) dampened demand for the pound in early trading on Tuesday. The CBI reported that British factory orders fell the fastest in three years. The high levels of uncertainty that still persist even though there are just 5 months to go until Brexit means manufacturers are the least optimistic since the Brexit referendum back in June 2016.

Businesses still don’t know whether an orderly or disorderly Brexit is on the cards. Investment. Given the complete lack of clarity, factories have scaled back on investments and analysts expect investment to hit a standstill over the coming three months. The disappointing report hit demand.

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.

Brexit developments were on hand to boost the pound in the afternoon session on Tuesday. Reports surfaced that the EU will give UK Prime Minister a helping hand in her hour of need. The EU will reportedly offer the PM a UK wide customs union as a way of getting around the Irish backstop issue. This would certainly satisfy Theresa May’s demands that Northern Ireland is to receive the same treatment as the rest of the UK. Should this be agreed, a soft Brexit is once again an option on the table.

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 Theresa May is set to face Tory backbenchers in an attempt to win them over. The pound will watch her performance and the rebels’ response closely.

US Stock Market Sell Off Weigh’s on Dollar

The dollar drifted lower in the previous session after rising for two straight sessions versus the pound. Usually geopolitical concerns would normally push investors towards the safe haven dollar. Geopolitical concerns are rife at the moment with fears over Saudi Arabia’s isolation following the death of Jamal Khashoggi, over Brexit and Italy’s growing conflict with the ECB. However, the US stock market suffered an extreme sell off on Tuesday. This put the dollar at a disadvantage versus other safe haven currencies.

Whilst geopolitics will remain a key driver for the dollar, investors will also look towards the US PMI figures for services and manufacturing.

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