The pound rallied over 1% versus the dollar in the previous week. Most of these gains were achieved at the beginning of last week. The dollar showed mores resilience and pound strength slowed in the latter part of the week. The pound has started this new week on the front foot, reaching a high of US$1.3080 overnight.
|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.|
The pound rallied in the previous week on speculation that the UK and Brussels were moving closer to a breakthrough in Brexit discussions. If UK Prime Minister Theresa May and the EU overcome the current impasse over the Irish backstop and Theresa May can take a more appealing Brexit deal back to Parliament, then there’s a better chance of it being voted through the House of Commons. This would result in a softer Brexit for the UK which is more beneficial for the UK economy and 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.|
Political turmoil overshadowed soft Brexit optimism in the second part of the week. Labour and Conservative ministers defected to the newly formed Independent Group, with more rumoured to be joining. This means that it could be even harder for a majority to be reached in the Commons.
Adding to the political turmoil, a 100 ministers have threatened to revolt and demand that Theresa May delays leaving the EU if a no deal Brexit remains an option. Theresa May has sought to calm nerves in Parliament by saying that ministers will get a meaningful vote on the supposedly updated Brexit deal on 12th March. She has said that she still believes an orderly Brexit on 29th March is possible, which is supporting the pound.
Easing US — China trade tensions at the beginning of last week meant that the dollar weakened. In times of a stronger geopolitical environment the dollar often trades lower as investors look for riskier assets. The dollar, being the reserve currency of the world, is a safe haven currency; more in demand when geopolitical tensions increase.
President Trump met with China’s vice President Liu on Friday and trade talks are once again being extended. Both sides are hopeful of closing a deal before the March 1st trade truce deadline. This would keep the dollar out of favour as the week begins.
Later in the week investors will be focusing on a slew of US data including US GDP and an appearance by Fed Chair Powell in a semi-annual appearance before the House. A dovish tone could pull the dollar lower.
|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.|
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