The pound soared versus the dollar as Brexit optimism and US Fed caution supported the exchange rate. The pound jumped to a 5-month high of US$1.3289 versus the dollar. The rate has eased back to US$1.3240 ahead of the European open today.
|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 surged higher on Tuesday, as investors cheered Brexit developments. UK Prime Minister Theresa May promised ministers a total of three votes. Firstly, there will be the meaningful vote on March 12th. Should ministers vote against Theresa May’s Brexit deal, they will have the option to vote to take a no deal Brexit off the table. Finally, in the case that Parliament votes to remove the no deal Brexit option, minister will then have the opportunity to vote to delay Brexit.
This is the first time that Theresa May has acknowledged that Article 50 could be extended after months of insisting that the UK would leave the EU on March 29th with or without a deal. Her hand was forced after she offered the votes as a way to appease 15 ministers who were threatening to resign in a bid to avoid the economic damage that a disorderly Brexit could cause.
Ultimately the pound is soaring as these latest developments are a step further away from a no deal Brexit. Instead the UK is taking steps towards a softer more business friendly and pound friendly Brexit.
|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.|
Brexit will remain in focus today as Parliament continues to vote on amendments to direct the Brexit process.
The dollar was out of favour on Tuesday as investors digested more words of caution from the Federal Reserve Chair Jerome Powell. Mr Powell reaffirmed the Fed’s patience towards hiking interest rates. This continued patience comes even as the Fed chair said that he expected solid economic growth across the year. The Fed Chairman said that crosscurrents and conflicting signals weakened the case for further rate rises. On hearing his testimony, investors pushed back the probability of further hikes and the dollar fell.
|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 there are several economic data releases which could catch the eye of investors. These include factory orders, trade balance and pending home sales. There will also be another appearance from Fed Chair Powell. He is unlikely to stray far from his comments before the Banking Committee on Tuesday. This could keep a negative tone to the dollar today.
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.