GBP/USD: Pound Weak vs. Dollar As Investors Question Where Now?

The pound closed 0.3% lower versus the dollar across the previous week at US$1.2582 after hitting a twenty-month low. This was the fifth straight week that the pound lost ground versus the US dollar. The pound is flat versus the dollar 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 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.

Brexit and political chaos sent the pound lowest across the previous week. UK Prime Minister Theresa May pulled the vote in Parliament on her Brexit plan, under the knowledge that she would not be able to push it through. She then survived a vote of no confidence, but with less that two thirds of her party supporting her. Finally, Theresa May returned from the EU Leaders summit without the reassurances that she was after over Brexit and more particularly the Irish backstop.

The pound cheered Theresa May winning the vote of no confidence, as the result provided a little political stability in this difficult period. However, the rally was short lived, and the other events dragged on the pound as they increase the chances of a no deal Brexit. Leading economists have frequently said that a no deal Brexit is the worst-case scenario for the pound.

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, economic data is in short supply and Brexit headlines will once again dominate movement on the pound. As the clock ticks, Theresa May is under growing pressure to end the current deadlock on Brexit. Support for a second referendum are growing this could boost the pound. However, signs of a no deal Brexit or a general election could hurt demand for the pound.

Dollar Boosted on Global Growth Fears

As concerns over the health of the global economy grow, investors have been increasingly turning towards the US dollar for its safe haven status. Last week, economic data out of China, the world’s second largest economy, in addition to weak stats from Europe, stoked fears that the global economy was slowing. Given the US dollar is the world’s reserve currency, in times of concern investors usually look towards safer bets such as the dollar.

This week the big event for the dollar will be the Federal Reserve policy announcement, due on Thursday. Analysts are expecting the Fed to hike rates for the fourth time this year.

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.

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