The pound dived 1.8%, to a low of US$1.2438 versus the pound on Wednesday in a flash crash. Fears over Brexit and global growth proved too much in these thin volume markets. This was the lowest level that the pound has traded at versus the dollar since April 2017 and represents a drop of almost 400 points from Monday’s high of US$1.2816. The pound was cautiously regaining some of those losses in early trade on Thursday.
|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.|
The pound experienced a flash crash in the previous sessions as fears grow of a no deal Brexit and the health of the global economy. UK manufacturing activity unexpectedly increased in December, jumping from 53.1 in November to 54.2 in December. This was well above the 52.5 that analysts had been forecasting.
Usually a strong manufacturing figure would boost the pound, this was not the case on Wednesday. The pound declined because investors are concerned that manufacturing activity picked up owing to front loading and stockpiling ahead of a possible no deal Brexit. As a result, the stronger data and increasing realisation that a no deal Brexit could be on the cards, unnerved investors.
|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, pound traders will be looking towards UK construction pmi data. The British construction sector grew at its fastest pace in four months in November thanks to house building and commercial building work. The strong growth occurred despite construction firms citing Brexit concerns weighing on the outlook for 2019. If that momentum proves to have continued into December, then the pound could receive a boost.
|How does strong jobs data boost the currency?|
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the goods and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.|
The dollar started the new year on a solid footing. The dollar moved higher in trading on Wednesday as market participants became increasingly nervous over the prospect of a slower global economy. Data from China and Europe showed that manufacturing activity was slowing, or contracting in China’s case, amid trade tensions with the US. The US dollar is the world reserve currency so when investors are worried, they tend to buy into the dollar.
Today investors will be watching the ISM Manufacturing numbers closely. Inline with Europe and China, analysts are expecting US manufacturing numbers to fall to 57.5 from 59.3 in November. Whilst this would represent a fall, manufacturing is still clearly strong. Should manufacturing activity be lower than analysts expectations investors could get jittery sending the dollar southwards.
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