Brexit uncertainties sent the pound steadily lower versus the dollar on Monday. The pound is extending those losses in early trade on Tuesday. After hitting a high of US$1.3219 on Friday, the pound US dollar exchange rate was down at US$1.3250.
|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 has rallied versus the dollar over the past six weeks as investors have become increasingly confident that the UK will not crash out of the EU without a deal. Since UK Prime Minister Theresa May’s Brexit deal suffered a historic loss in Parliament, investors have been placing their bets on the UK avoiding a no deal Brexit.
Today the House of Commons will vote on Theresa May’s Brexit plan B, which is incredibly similar to her Brexit plan — A. The vote could potentially change the course of Brexit. There are two rival sides within Parliament. If one wins then Brexit is likely to be delayed through the extension of Article 50, giving Parliament more time to resolve how to leave the EU on improved terms, or not leave at all.
If the other side wins then Theresa May will be sent back to Brussels to renegotiate the Irish backstop part of the deal. This is the most controversial part of Theresa May’s Brexit plan and the part that most ministers are unable to accept.
It is impossible to predict which side will be able to claim victory. This will depend on which amendments they vote on. Any move away from the UK crashing out of the EU in a no deal hard Brexit could boost 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 fairly subdued in trading on Monday as investors look ahead to a busy week. Dollar traders were opting to sit on the side lines as traders prepared for events later in the week. The two most important monthly events, the Federal Reserve interest rate decision and the US jobs report are both due this week. Furthermore, with the opening on the US government US economic data will once again be released after 35 days of limited economic statistics. Finally, the US — Sino trade talks starting on Wednesday could also impact on the dollar.
With so many risk events lined up volatility in the dollar volatility could increase this week.
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.