GBP/USD: Pound Higher vs. Fed Weakened Dollar

The dollar was once again on the back foot on Wednesday amid further evidence of the Federal Reserve adopting a more dovish tone. The pound US dollar exchange rate rallied to a high of US$1.28 despite Brexit uncertainties mounting.

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.

Brexit headlines were in focus as the Brexit withdrawal bill was debated in Parliament. UK Prime Minister Theresa May has now been defeated twice in Parliament in as many days. This shows that Theresa May has lost momentum for her deal and authority within her party. This is the clearest sign that Theresa May’s Brexit deal is unlikely to be approved by Parliament. Theresa May’s office, also for the first time has addressed what would happen if the PM lost the key vote in Parliament.

Yesterday’s defeat in Parliament means that Theresa May will now have 3 days to put forward her plan B, rather than the 21 days that was agreed back in December. The Remainers are using all the tactics that they can to prevent a no deal Brexit. The declining prospect of a no deal Brexit is favourable to the pound. Yet whilst Parliament is showing that it is not willing for a no deal Brexit to happen, Parliament has not expressed what it sees the solution to be. The increased uncertainty and possibility of a general election is hitting demand for 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.

Today there is no economic data to be released. This means that the focus will remain heavily on Brexit developments, which are coming through thick and fast.

Dollar declines on dovish fed

The dollar was once again out of favour on Tuesday as evidence mounted of the Federal Reserve’s dovish tone. The minutes from the FOMC showed that whilst the Fed unanimously voted to raise rates, there were growing concerns over the outlook. Fed officials were more cautious than what the post announcement statement expressed. The main message from the minutes was that Fed officials were prepared to put interest rate hikes on hold until there was more clarity on the risks to global growth, which could impact on the US economy.

There are a couple of data points which could attract investor attention on Thursday. For example, US jobless claims or the US trade balance. Another speech by Fed Chair Powell could also drive dollar movement.

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