Following UK Prime Minister Theresa May’s Brexit Plan B, the pound advanced versus the dollar. The pound US dollar exchange rate increased 0.2% across Monday’s session, hitting a high of US$1.2911. The pair edged lower in early trade on Tuesday.
|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.|
As political analysts and market participants had expected, Theresa May’s Brexit plan B was remarkably similar to her Plan A. In fact, Plan B is quite simply to continue driving forward Plan — A. Even though Theresa May said no to delaying Brexit, no to avoiding Brexit and no to a second referendum, pound traders aren’t convinced.
The PM said that she would return to Brussels in search of further re-assurances over the Irish backstop. However, EU Chief negotiator Michel Barnier quickly rebuffed her ideas, confirming that there was no room for further negotiation. With Theresa May seemingly making little progress pound traders are seeing a growing possibility of a delay to Article 50. A delay in Article 50 would give more time for a second referendum to be held. This would increase the chances of Brexit not happening, which is favourable for the pound.
|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 investors will continue watching Brexit headlines. However, UK average weekly earnings data will also grab investors attention. Analysts are expecting the data to show that UK weekly earnings increased by a solid 3.3% in the 3 months to November. This would be strong reading and is substantially above inflation, suggesting the squeeze that households have been under is finally easing. This would mean households have more disposable income to spend, which is good news for the UK economy and the pound.
The dollar was broadly in favour in the previous session and was gaining ground in early trade on Tuesday. Fresh concerns over the health of the global economy and fears over global growth prompted investors to move into safe haven currencies, such as the dollar. As the dollar is the world’s reserve currency, in times of heightened fears investors tend to move into this safer currency.
Overnight the International Monetary Fund (IMF), cut its global growth forecasts, citing a bigger than forecast slowdown in both China and the eurozone. The IMF warned that failure to resolve trade tensions could have a deeper impact on the global economy.
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Inc., Currency Live or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. Consult our risk warning page for more details.
This article was initially published on TransferWise.com from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.