Pound At 3 Week High vs. Dollar As US Midterm Election Results Come In

The pound was buoyant in the previous session, supported once again by Brexit optimism. The dollar was also under pressure in early trade as US midterm election trickled in. On Tuesday the pound rallied over 0.5% to a high of US$1.3114 and continued climbing on Wednesday to US$1.3144. This is the highest level that the pound has reached versus the dollar in over three 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.

Market participants are growing increasingly convinced that a Brexit deal will happen. The pound rallied versus the dollar for the third straight session on Brexit optimism. All it took was a thumbs up gesture from Brexit Secretary Dominic Raab, as he exited a cabinet meeting, for the pound to charge higher, giddy on excitement of a deal.

UK Prime Minister Theresa May has reportedly ordered her ministers to make a final push for a Brexit deal this week. Theresa May has ordered her cabinet members to be ready for a cabinet meeting at the end of the week to approve an outline deal on Britain’s exit treaty. This would open the way for an extraordinary European Council meeting in November to sign the agreement off.

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 there is just mid-tier housing data for investors to be distracted by. This is unlikely to create a large reaction to the pound. Brexit developments will remain the key driver for sterling.

Republicans take Senate, Democrats for the House?

The dollar closed the previous session flat as investors focused on the US midterm elections. As trading kicked off on Wednesday the dollar was trading sharply lower. Investors were digesting the midterm election results as they trickled in across the night.

Analysts had broadly expected the Republicans to retain control in the House of Senate. The race for the House of Representatives is broadly going as analysts expected, with the consensus still on the Democrats clinching the House. Analysts believe the House of Representatives going to the Democrats will have a negative impact on the dollar. The fact that the dollar is falling suggests market participants believe that the Democrats will take the House.

Investors will remain heavily focused on the developments in the US elections as results continue to come in.

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