As the UK moves further away from a no deal Brexit and as UK wage growth impresses, the pound jumped 0.4% versus the dollar. The pound US dollar exchange rate peaked at US$1.2975, as it continues to hover around 2-month highs.
|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.|
Brexit headlines continue to drive movement in the pound. However, UK wage data also attracted a fair amount of attention in the previous session. The pound moved higher after data showed that total pay increased at the fastest pace in a decade and unemployment unexpectedly fell back to 4%.
Pay including bonuses increased 3.4% in the three months to November, ahead of the 3.3% analysts had pencilled in. With inflation ticking lower and back at the Bank of England’s 2% target households are receiving a decent pay increase in real terms. This is boosting living standards and should increase consumption, good news for the UK economy and therefore the pound. All this is particularly impressive given the uncertainties caused by Brexit.
|How does strong jobs data boost the currency?|
|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 goods 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 the worth of the currency higher.|
With no high impacting UK data due today, investors will remain glued to Brexit headlines. The latest reports point to the UK moving further away from a cliff edge no deal Brexit. The opposition party is now increasingly likely to support a proposal extending Article 50 beyond 29th March deadline should Theresa May fail to negotiate a palatable divorce agreement. The party considers this a sensible way to avoid a disastrous no deal Brexit. Any move away from a no deal Brexit is good news 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.|
The dollar was broadly flat in the previous session, although less in demand versus the pound. Continued concerns over the health of the global economy support the dollar thanks to its safe haven attributes. Chinese economic growth was the slowest pace in 28 years. The International Monetary Fund lowered global growth outlook for 2019. The data is not encouraging.
Furthermore, concerns are growing that there hasn’t been sufficient progress in US — Sino trade talks ahead of an importing meeting at the end of the month. This is adding to the cautious trading environment. When investors are nervous they tend to buy into safe haven currencies such as the dollar.
Once again there is no US economic data thanks to the US government shutdown.
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.