The pound tumbled versus the US dollar across Thursday as Brexit jitters hit sentiment. The pound US dollar exchange rate dropped to a 4 week low of US$1.2773 before picking up slightly towards the close.
|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 dropped to its lowest level in 4 weeks ahead of the Brexit vote in Parliament. Rumors across Wednesday that UK Prime Minister Theresa May would lose the vote in the Commons hit demand for the pound. Theresa May suffered another humiliating defeat on Wednesday with 303 voting against her and 258 in favour. Parliament rejected Theresa May’s Brexit approach for a second time as the Eurosceptics in her party revolted.
Theresa May was attempting to buy herself more time to renegotiate the Irish backstop arrangement in her Brexit deal. However, her political manoeuvring has angered both Eurosceptics and pro-Remainers. As a result, she lost the vote.
This means that the UK is on track to leave the EU on 29th March without a deal, even though Parliament is not in favour of a no deal Brexit. The next steps of the Brexit process look rather vague. The lack of clarity and certainty is hurting the pound.
Investors will remain glued to Brexit headlines today. Any signs or optimism that a hard, no deal Brexit will be avoided will support the pound. Otherwise Brexit nerves are likely to keep sterling under pressure.
|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 dropped sharply and across the board on Thursday, except against the pound, following weak retail sales data. US retail sales were significantly softer than what analysts had been expecting. Retail sales unexpectedly declined -1.2% in December, rather than increasing 0.1%. This was the worse drop in retail sales in nine years and raises concerns that the US economy is cooling more quickly than market participants had originally feared.
The data supports the Fed’s view of holding off on raising interest rates and could mean the next hike is some way in the future. As a result, the dollar dived.
|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 investors will turn their attention to US consumer sentiment figures. Yesterday’s retail sales data shows investors are not spending. It is therefore important to understand the retail sales numbers in relation to consumer sentiment. If sentiment remains elevated then the fall in retail sales could be temporary. Analysts expect sentiment to have increased in February. Should this be the case the dollar could regain some losses.
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