GBP/USD: Pound Dips vs. Dollar As Brexit Saga Continues With Plan - B

The pound’s uptrend continued last week. The pound climbed a further 0.3% versus the dollar. This was its fifth consecutive weeks of gains. The pound US dollar exchange rate rallied to a 2-month high of US$1.3002 despite the UK Parliament rejecting Prime Minister Theresa May’s Brexit deal. The rate was losing ground as the new week begins, moving towards US$1.2850.

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.

Market participants and political analysts had been expecting the Brexit deal defeat in Parliament. The following rally in the pound was a little more surprising. Rather than viewing Parliament’s rejection of the deal as a step closer to a no deal Brexit, pound traders were assuming that a delay in leaving the European Union is more likely.

The pound fell away from its high on Friday after retail sales data was weaker than forecast. Retail sales decline -0.9% month on month in December. This was well below the 1.3% growth in November. The weaker data served to remind pound traders that the UK economy was not in a good place.

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

Brexit headlines will continue to drive the pound this week. Theresa May is due to announce her Plan — B today; a plan that she needs to be accepted by Parliament and by Brussels. Right now, pleasing both sides seems an almost impossible challenge and one that will prompt volatility in the pound. Any hints from the government that there could be a softer version of Brexit or a delay to Brexit could help boost the pound. On the other hand, a move towards a no deal Brexit will send the pound crashing lower.

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.

Dollar Under Pressure As US Government Shutdown Continues

The dollar was broadly weaker across the previous week as concerns grow over the negative impact that the US government shutdown is having on the US economy. Government workers are not being paid, consumer confidence is being hit and business uncertainty is increasing. Economists are warning that the shutdown is having a bigger impact than initially thought and could even lead to the stalling of economic growth in the first quarter of the year.

With the shutdown continuing, US data is thin on the ground. The US dollar will trade on sentiment rather than economic releases.

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