GBP/USD: Fed Powell Sends Dollar Tanking vs Pound As UK Brexit Debate

The pound closed higher versus the dollar in the previous week, booking a third straight week of gains. The pound US dollar closed the week at US$1.2703 thanks to a more dovish Fed. Sterling was once again moving higher versus the dollar early 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.

The pound rallied on Friday thanks to data which showed that the UK service sector was holding up better than analysts had been expecting. The service sector PMI rose to 51.2 in December, up from 50.4 in November and well ahead of the 50.7 that analysts had forecast. The service sector is by far the most important sector in the UK economy. The fact that service sector activity increased by more than expected, despite increasing Brexit uncertainties, boosted the pound.

This week Brexit will take centre stage. The UK will enter a critical period as British ministers return to Parliament after the Christmas break. The Brexit deal will be debated once again in Parliament, before being voted on in the week beginning 14th January.

Political analysts still expect the deal to be voted down in Parliament as UK Theresa May has failed to gain any further reassurances from Brussels over the Irish back stop. Should the deal not pass through Parliament, Theresa May has failed to say what will happen next. In interviews over the weekend Theresa May failed to rule out taking the Brexit deal to Parliament multiple times. She also failed to rule out a second referendum. Hope of a second referendum could at least offer some support to the pound, as Brexit uncertainty increases.

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.

Powell Sends NFP Boosted Dollar Lower

The dollar had a very mixed Friday, although US jobs data impressed – boosting the dollar – cautious comments from Federal Reserve Chair Powell dragged the dollar lower.

The US non-farm payroll report smashed analysts’ expectations. The report showed that 314k new jobs were created in the US in December. Which was well ahead of the 184,000 that analysts had predicted. Furthermore, average wages increased quicker than what analysts had forecast at 3.2% on a yearly basis. The dollar rallied on the impressive stats.

How does the non-farm payroll (NFP) affect the US dollar?
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 good 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 up the currency’s worth.

However, the rally was short lived. US Fed Chair Powell’s more dovish comments pulled the dollar lower. Powell said that whilst economic data remains strong, the central bank will be “patient” in its approach to monetary policy. The Fed will continue watching economic data very closely and will adjust monetary policy, should economic growth start to slow. The Fed acknowledging that they may not raise interest rates hit demand for the dollar.

There are plenty of highly influential factors for the dollar in the week ahead. Not just US economic stats will attract attention, with the most important being released today – non-manufacturing pmi – and factory orders tomorrow. Any updates of trade negotiations between US and China will also drive movement, plus news about the US government shutdown.

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