News that the UK and Brussels had agreed a draft text outlining the future relationship between the two sides post Brexit sent the pound higher. The pound US dollar exchange rate reached a week’s high of US$1.2924 before easing back below US$1.29.
|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.
The pound charged higher against its peers in the previous session, as investors cheered the agreement of future ties between the UK and the EU. The leaked document was broad, covering points from trade liberalisation through to police co-operation. However, it did stop short at UK Prime Minister, Theresa May’s idea of frictionless trade. Pound traders focussed on the ambitious tone of the agreement and the sheer relief that it was agreed ahead of the deadline of 25th November. This agreement provides a more optimistic outlook for Brexit and will help Theresa May push the Brexit package through Parliament.
|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.
There are still a few creases to be ironed out, such as Gibraltar. However, Theresa May and her team are confident that this will be arranged before Sunday’s extraordinary European Summit of leaders.
Parliament will vote on both the Brexit treaty, which almost cost Theresa May her job given the opposition to it, and this Brexit future ties agreement as a joint package for Brexit. The vote is due to take place in the second week of December.
There is no UK economic data due for release today. Brexit will remain front and central to pound investors.
The US markets were closed for Thanksgiving on Thursday, which meant that the dollar lacked volume, making for a volatile session. It was trading lower across the board and has started Friday in the same fashion.
The dollar continues to drift lower as investors are questioning whether the Federal Reserve will continue ahead with their planned path of rate rises given slowing global growth. Market participants are confident that the Fed will hike rates in December. Following some more dovish comments from Fed officials last week, doubts remain about the path of hikes across 2019. Investors are expecting three hikes, however these are now looking less certain.
|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.
Today investors will look towards the US Manufacturing and services pmi’s which analysts believe will has increased in October. This could help boost the dollar.
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