GBP/USD: Pound High vs Dollar As No Deal Brexit Risk Fades

Whilst Theresa May continued her cross-party Brexit talks the pound moved higher. The pound US dollar exchange rate jumped over 100 points, to a 2 month peak of US$1.30.

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.

Theresa May suffered a landslide defeat on her Brexit bill in Parliament on Tuesday. She then survived a vote of no confidence called by the leader of the opposition, Jeremy Corbyn, on Wednesday. By Thursday the Prime Minister was holding cross party talks in an attempt to find a Brexit deal that would make it through a Parliamentary vote. Jeremy Corbyn has so far boycotted the talks telling Theresa May that he will only sit down and talk if the option of a no deal Brexit is taken off the table. Corbyn also suggested that a second referendum could be necessary.

The pound rallied on the belief that the UK is less likely to have a no deal Brexit. Few ministers are in favour of a hard, disorderly Brexit. A no deal hard Brexit would hit business and consumer confidence, hurting the economy and therefore the pound. Instead there is s growing optimism among traders that Brexit might not happen.

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.

Theresa May will need to give her Plan B for Brexit on Monday. She has delayed its discussion in Parliament by 2 weeks until 29th January. It will be voted on in Parliament on the same date.

Brexit headlines have been dominating movement in the pound. Investors have paid little or no attention to economic releases through the week, including the usually influential inflation reading. Today, should there be a lull in Brexit headlines, investors could look towards UK Retail sales figures. Analysts expect UK retail sales to remain elevated at 3.8%. A strong reading could boost the pound.

Why does strong economic data boost a country’s currency?
Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.

Dollar Flat On Strong Data and Easing Trade Tensions

The dollar traded broadly flat in the previous session as strong US data was balanced out by hope of de-escalating trade tensions.

Reports that officials within the Trump administration are pushing for an easing of trade tensions with China helped keep the dollar low. When trade tensions escalate the dollar benefits, thanks to its safe haven status. So, when there are signs that tensions are easing the dollar generally declines.

Declines were limited as the dollar also received a boost from strong data. US economic data is in short supply thanks to the US government shutdown. This means that investors have limited information regarding the US economy. US jobless claims was released on Thursday. The better than forecast numbers were an encouraging sign for investors.

Today, US consumer confidence will be under the spotlight, which analysts predict has declined. This could pull the dollar lower.

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