GBP/USD: Pound Steady As Brexit Limit BoE's Options

The pound showed resilience versus the US dollar for much of the session on Wednesday, before moving into negative territory towards the close. The pound finished 0.1% lower versus the dollar at US$1.2933.

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 USDHere, £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 GBPIn 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 continues to weigh on demand for the pound. European Council President Donald Tusk warned that there would be no new proposals to break the Brexit deadlock. Whilst hopes that the deadlock may mean a delay for Brexit supported the pound in early trade, no deal Brexit fears were back in the driving seat by the afternoon.

The Bank of England (BoE) monetary policy announcement and quarterly inflation report will grab investors attention today. Analysts are not expecting the central bank to change monetary policy. The interest rate will be kept on hold at 0.75%. Given that Brexit is just 50 days away and so far there is no Brexit deal in place, the BoE’s hands are tied. The next stage for the UK economy and monetary policy depends on how the UK is leaving the EU, in an orderly or disorderly manner.

Brexit progress has been close to zero. Parliament voted down Theresa May’s Brexit deal. She has so far been unable to achieve a variation on the current proposal with the EU as Parliament instructed her to do. As a result, market participants expect the BoE to continue warning of the damages of a no deal Brexit on the economy. They also expect the BoE to stick with the one hike per year line until Brexit clouds start clearing.

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.

Dollar Rises on Euro Weakness & Solid Data

The dollar was in demand in the previous session after data showed that the US trade surplus narrowed by more than what analysts had been expecting, whilst euro weakness also supported the greenback.

The dollar trades inversely to the euro and the euro fell sharply on Wednesday on economic growth worries for the region. As the euro fell the dollar moved higher.

The US trade deficit, which measures the difference between US imports versus exports, declined to $49.3 billion in November, down from $55.7 the previous month. This is good news for the US economy and therefore boosted the dollar.

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.

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