The pound moved steadily lower versus the dollar on Wednesday, until the Fed’s press conference. This weakened the dollar boosting the pound US dollar exchange rate. The pair rallied to a high of US$1.3146. This is still some distance from the previous week’s high of US$1.3218. The pound US dollar exchange rate is moving cautiously higher in early trade on Thursday.
|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 nerves were responsible for pulling the pound lower across most of Wednesday. Following the vote in Parliament earlier in the week on UK Prime Minister Theresa May’s Brexit plan B, concerns over Brexit were once again evident. Parliament voted to send Theresa May back to Brussels to re-open negotiations on the Irish backstop; the most contentious part of the Brexit deal. Theresa May’s ability to make progress is clearly dependent on the EU’s willingness to join her at the negotiating table.
The EU have continually said that they are not prepared to reopen the negotiations. European Commission President Jean — Claude Juncker repeated that stance on Wednesday. He also gave a stark warning that the UK was heading closer towards a disorderly, no deal, hard Brexit by wanting to reopen the divorce deal.
The pound is under pressure as investors start to accept again that a no deal Brexit is still a possibility. A no deal Brexit would be the most damaging for UK businesses, the UK economy and therefore 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.
As analyst had expected, the Federal Reserve kept monetary policy unchanged. The dollar tumbled lower as Fed Chair Jerome Powell indicated that it would put raising interest rates on hold. After 4 rate hikes across 2018 the Fed said that it was pausing any further hikes owing to weak inflation and growing concerns over the health of the global economy.
This is a U turn from Jay Powell, which just six weeks ago was still paving the way for further rate rises across 2019. With the prospect of further rate rises off the radar the dollar was looking a lot less attractive to investors.
|Why do raised interest rates boost a currency’s value?
|Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.
Today US data will continue to pour through after the end of the US government shutdown. US inflation numbers will be the most closely watched.
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