GBP/USD: Pound vs US Dollar Rally Continues To 14 Week High

After initially dipping lower versus the dollar, the pound US dollar exchange put in a late rally on Thursday. A late surge in demand for the pound and selling of the dollar sent the pound US dollar exchange rate to a high of US$1.3129. This is the highest rate the pair has traded in three and a half months.

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.

The pound re-gained lost ground later in the session on Thursday, as pressure mounted on UK Prime Minister Theresa May to take off the no deal Brexit option. Her Chancellor, Philip Hammond is the latest on a growing list that are insisting that Theresa May takes no deal Brexit off the table. Hammond’s comments that a no deal Brexit would be very destructive to the UK economy were also supported by business leaders, who are also racketing up pressure on May.

Airbus, one of the largest manufacturers in the UK, said that it would consider relocating under a no deal Brexit scenario. And they are not the first to mention such intentions. Jaguar Land Rover has also been vocal about the impact and madness of a no deal Brexit.

With pressure increasing daily on Theresa May to remove a no deal Brexit option, investors are starting to think that she will have no choice but to cave in. A no deal Brexit is the most damaging to UK businesses, the UK economy and therefore the pound. Taking this option off the table would send the pound higher.

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.

Strong US Data Sends Dollar Higher

The US dollar rose in the previous session after US PMI data impressed. The activity levels in the manufacturing sector and the service sector unexpectedly increased in January. US businesses reporting a better than expected start to the year has calmed investors. The private sector data shows that the current US government shutdown has had little if any impact on the private sector.

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.

The US senate blocked a bill to fund the government and end the current government shutdown. The shutdown will enter its 35th day today and there is still no clear path to reopen the 9 closed departments. 800,000 workers are without pay for over a month. Whilst the PMI data suggest that there has been limited impact, when these workers miss a second paycheck, they are likely to feel strapped for cash and the knock effect on the economy will be inevitable.

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