The pound extended gains on Wednesday, hitting a 7-month high versus the dollar. The pound US dollar exchange rate powered through $1.33 to a peak of $1.3349.
|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 optimism continues to be the key factor driving the pound higher. On Wednesday it became apparent that Brexit hardliner MP Rees-Mogg was softening his stance on UK Prime Minister Theresa May’s Brexit deal, by dropping key demands over the Irish backstop arrangement. Now that Theresa May is offering a vote to ministers to avoid a no deal Brexit, the option of Theresa May’s deal or no deal no longer exists. As a result, the Eurosceptic Brexiteers are looking more willing to accept Theresa May’s deal as a way of ensuring that Brexit actually happens.
The UK leaving the EU with Theresa May’s deal is more business friendly and therefore pound friendly than crashing out in a chaotic 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.|
The pound’s recent rally could come under strain today as investors digest the latest UK consumer confidence figures for February. Analyst expect consumer sentiment to fall again in February as Brexit uncertainty continues to weigh on the economic outlook.
The dollar traded broadly flat on Wednesday. Whilst Federal Reserve caution weighed on the dollar, increasing geopolitical tensions between India and Pakistan lifted demand for the safe haven currency.
As tensions between India and Pakistan escalate to the worst level since the 1971 war, demand for the dollar increased. In times of geopolitical tensions investors tend to buy into the dollar, the reserve currency of the world, for its safe have properties.
Federal Reserve Chairman Jerome Powell made a second appearance in his semi-annual testimony before Senate. The Fed chairman repeated his position that the Fed would be patient with hiking rates, preferring to watch how the economy evolves.
The dollar could find itself under further pressure today as investors look towards the US GDP release. Analyst expect the US economy has slowed to 2.2% in the fourth quarter. This is well below the reading of 3.4% for the previous quarter, in a clear sign that the US economy is slowing.
|Why does poor economic data drag on a country’s currency?|
|Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.|
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.