The pound rallied to a high of US$1.3154 as UK main opposition party Labour came out in support of a second referendum. This is the highest level that the pound has traded at versus the dollar in a month.
|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 charged higher in the previous session after Labour leader Jeremy Corbyn announced a dramatic shift in position to support a second Brexit referendum. The party has said that it will put forward an amendment in the next couple of day in favour of a public vote. The Labour leader has shown an interest in a second referendum for the past 6 months. However, this is the first serious step that Jeremy Corbyn has taken towards putting processes into place for a second vote.
The pound moved higher because this opens the possibility of Brexit not actually happening. Given that economists consider that Brexit is damaging to the UK economy, any chance of avoiding it is beneficial for the UK economy and therefore the pound.
Today Theresa May will present any developments in Brexit talks to Parliament. The House will then vote on amendments. However, given that this is not the final meaningful vote, the pound’s reaction could be limited. The meaningful vote has now been delayed by Theresa May until 12th March. This will be just 17 days before the UK is set to crash out of the EU with or without a deal.
|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 broadly out of favour in the previous session amid improved relations between China and US. After two weeks of intense negotiations between officials from the world’s two largest economies, Trump has said that the trade truce deadline will be extended. Furthermore, Trump raised hopes that he could sign a new trade deal with China as both sides indicated significant progress had been made.
As trade tensions eased, flows into the dollar, which is also a safe haven, decreased. This is because investor appetite for risk picked up and investors look to buy into riskier currencies.
Today sees a slew of US data being released, in addition to Federal Chair Jeremy Powell’s appearance before the senate banking panel. Should Powell continue with his recent cautious tone, the dollar may move lower as investors push back the chances of an interest rate rise.
|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.
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.