GBP/USD: Pound Lower vs. Dollar As PM Theresa May Alienates EU Council

The pound extended gains versus the US dollar for the second straight session on Thursday. The pound US dollar exchange rate hit a peak of US$1.2686, before fading into the close. The pair ended Thursday 0.2% higher, although was moving lower again in early trade on Friday.

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.

On Thursday, investors continued to cheer UK Prime Minister Theresa May’s performance in the vote of no confidence. Theresa May successfully seeing off a coup from Eurosceptics in her party, offered some support to the pound. However, pound traders were also turning their attention to the enormous challenge ahead of the Prime Minister. In order to push the Brexit deal through Parliament Theresa May will need 350 supporters. She only managed 200 votes in the vote of no confidence, meaning that arithmetically it looks almost impossible for Theresa May to achieve the necessary numbers. Theresa May desperately needs Brussels to offer the reassurances that she is after for this deal to even have a hope of making it through Parliament.

Theresa May arrived to a warm reception at the EU Summit. However, during a presentation she succeeded in alienating many of her fellow leaders after putting forward a series of ambitious proposals to appease her critics. However, the EU Council considered that rather than seeking reassurances Theresa May was in fact digging up old ideas which had already been rejected in previous negotiations. So far Theresa May has been offered nothing new to help the deal over the line, increasing the chances of a hard Brexit.

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.

US Retail Sales & Fed Move In Focus

The dollar firmed versus its peers overnight and in early trade this morning. Investors’ attention switched towards the Federal Reserve rate decision next week. The meeting will take place on the 18-19th December. The Fed are expected to raise rates for the fourth time this year. However, there are some doubts as to what the Fed’s path of hikes will look like next year given Fed comments that they could be close to the neutral rate and recent soft data.

Today investors will focus on US retail sales. Analysts expect sales to dip in November to 0.1% month on month from 0.8% the month previous. That would be a significant decline and could weigh on demand for the dollar after the release.

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.

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