Brexit fears really started to take hold of the pound on Tuesday. The pound fell to its lowest level in 11 months against the stronger dollar, touching a low point of US$1.2698.
|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.
Just one day after UK Chancellor’s optimistic budget, Brexit fears were once again driving movement in the pound. As the clock keeps ticking, investors are growing increasingly nervous over the lack of progress. Talks appear to still be in deadlock at a time when the deal should be on the table.
The lack of development was accompanied by comments from the rating agency, the S&P, which said that a no deal disorderly Brexit would result in the UK falling into recession. The picture painted by the S&P was extremely gloomy with economic growth falling negative and unemployment rising to 7%, a level higher than during the financial crisis. Furthermore, the rating agency forecast inflation at 4.7% and house prices to decline by 10%.
The S&P’s forecasts echoed those of business leaders and leading economists that have predicted the UK economy falling into very difficult times amid a no deal Brexit.
|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 investors will continue to focus on Brexit. They will also glance towards consumer confidence figures for October. Analysts expect the data to show that consumer confidence dipped again, hardly surprising given the uncertainty surrounding Brexit.
The dollar was lifted in the previous session after US consumer confidence hit a fresh 18 year high, highlighting the growing differences between the US and UK consumer. Analysts had been expecting US consumer confidence to tick lower in October to 136. Instead confidence jumped higher to 137.9.
The strong jobs market is supporting households and giving consumers confidence in the future outlook of the economy. This is important because confident consumers spend money, which continues to support the US economy.
|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.
Today investors will continue to focus on the US economic calendar, with the ADP private payroll figures under the spotlight ahead of the US jobs report on Friday. A strong reading could help the dollar move higher.
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