A stronger pound combined with a weaker dollar boosted the pound US dollar exchange rate on Monday. The pound charged 0.5% higher versus the dollar, hitting a peak of US$1.3056. This is the highest level that the pair have traded at in two weeks.
|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 USDHere, £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 GBPIn 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.|
The pound showed strength on Monday even as Brexit uncertainty increased and UK economic data disappointed. Brexit uncertainty contributed to a steep decline in service sector activity in October. UK service sector activity grew at its slowest pace in seven months at just 52.5. This was well short of what analysts had been anticipating. It was also a significant decline from last month’s 53.9.
The companies that responded to the survey identified Brexit uncertainty as a key contributing factor to the slowdown in demand. With the UK service sector contributing to over 80% of economic activity in the UK, any slowdown is carefully watched. This is one of the most crucial pieces of data so far, showing the slowdown in activity that Brexit is causing. Though this data would have usually dragged the pound lower.
|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.|
Conflicting Brexit headlines dominated pound traders mind. Not all headlines were optimistic, in fact the majority raised Brexit fears further. Still the pound traded higher.
Today UK Prime Minister Theresa May will pile pressure on Eurosceptic cabinet members. Theresa May will warn that time is running out and that the UK will have to concede some ground over the Irish backstop in order to avoid a disorderly Brexit. The reaction of her cabinet could drive movement in the pound.
The dollar traded lower vs the pound in the previous session, as investors looked ahead to the US midterm elections. The entire House of Representatives and a third of the House of Senate is up for grabs. Opinion polls are showing that the US Democrats could flip the House of Representatives tomorrow, although the Senate is expected to remain with the Republicans.
A Democrat win could push the US into political gridlock will few policies making it through the government. With fewer of Trump’s expansionary fiscal policies pushing up inflation, analysts believe this would be a slightly negative outcome for the dollar.
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