The pound rallied in the previous session across the board in anticipation of UK Prime Minister Theresa May winning a vote of no confidence that has been requested against her. News that she won resulted in the pound US dollar exchange rate surging 1.2% across Wednesday, hitting a high of US$1.2672 before dropping slightly into the close and in early trade this morning.
|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.
Theresa May survived an attempted coup by Eurosceptic Conservatives last night. She won a vote of no confidence by 200 votes to 117. These results show just how divided the Conservative party is. In order to secure the win, she said that she would not be putting herself forward for re-election at the next general election. Under the rules of Parliament her leadership cannot be challenged again for another 12 months, which leaves Theresa May time to get on with Brexit. The declining political risk helped lift the pound.
|How does political risk have impact on a currency?
|Political risk drags on the confidence of consumers and businesses alike, which means both corporations and regular households are then less inclined to spend money. The drop in spending, in turn, slows the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. Signs that a country is politically or economically less stable will result in foreign investors pulling their money out of the country. This means selling out of the local currency, which then increases its supply and, in turn, devalues the money.
However, attention will now swing back to Brexit. Theresa May now knows she must win the support of 117 Conservative Ministers who didn’t back her, in order to get her Brexit deal through Parliament when it is voted on next month. Theresa May is back off to Brussels in an attempt to secure further assurances regarding the Irish backstop.
US inflation increasing at its slowest pace in 9 months weighed on demand for the dollar in the previous session. Inflation, as measured by consumer price index, dropped from 2.5% in October to 2.2% in November thanks to falling energy costs. Core inflation, which removes more volatile items such as food and fuel, increased from 2.1% to 2.2%.
Analysts still expect he Federal Reserve to raise interest rates for a fourth time when they meet this month. However, the outlook for further rate rises next year is no longer so clear as fears over sharply higher inflation never really materialised. The mixed data did little to convince investors that the Fed would ramp up interest rates next year, which ep the dollar out of favour.
|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 jobless claims. After the weaker than forecast job creation data last week, investors will watch any developments in the jobs market carefully
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