The pound steadily lost ground versus the dollar on Friday, closing at US$1.2813. This marks a loss of 0.5%, which resulted in a 0.2% loss for sterling versus the dollar across the week. The pound is edging cautiously higher in early trade on Monday.
|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.|
Brexit continues to dominate direction in the pound. Over the weekend, the European leaders approved the Brexit divorce deal. Whilst this is another step towards Brexit, market participants had been expecting the European leaders to sign off the deal. Investors will now focus on UK prime minister, as she campaigns for her Brexit deal, in what is likely to be Fear Project part II – scaring Brexiteers into supporting her.
After two weeks of hard campaigning the Brexit package will be voted on in Parliament.
Investors will now be very focused on this. If Theresa May fails to get a majority on the divorce in December, the alternative will be a hard, no deal Brexit. This alternative is particularly damaging to the UK economy, at least in the short and medium term. This means that it is also likely to send the pound lower.
|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.|
The next fortnight will be a hard struggle for Theresa May. She will need to get her party onboard, which will be challenging as the current Brexit plan pleases neither the Leavers or the Remainers. Around 80 members from Theresa May’s Conservative party have said they won’t vote in favour so she will need to entice some rebels from the opposition to reach the number needed.
Analysts are expecting the week ahead to be a busy week for the dollar. Whilst today is quiet as far as the US economic calendar is concerned, things pick up as from tomorrow. US Consumer confidence, economic growth and the minutes from the Federal Reserve policy meeting plus inflation statistics are all due to be released.
The key releases of GDP and inflation on Thursday could have less impact on the market than usual. This is because investors will be looking towards the G20 summit in Buenos Aires at the end of the week. Particular attention will be on President Trump and China’s President Xi for any signs of progress in trade talks. Any progress will be positive for risk appetite, in general. This means it could be less beneficial for dollar.
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