The pound US dollar exchange rate snapped a 5-day winning streak on Thursday. Brexit concerns and stronger than forecast US economic growth data sent the pound US dollar exchange rate to a low of US$1.3254.
|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 has lifted the pound over 1.6% higher versus the dollar this week. Pound investors were more confident after Theresa May pledged a vote between a no deal Brexit and delaying Brexit to ministers, should her Brexit deal be defeated in the meaningful vote. However, on Thursday concerns were growing over Theresa May’s progress with talks in Brussels which was hitting the mood towards sterling
Theresa May continues to try to negotiate with the EU to ensure that the UK won’t be trapped indefinitely within the grasps of the EU after March 29th. She is doing this by trying to change the terms of the Irish backstop arrangement. However, a spokesman for the government confirmed that there was still a significant amount of work to be done in negotiations in order to arrive at a deal that would be palatable to minister back in the UK. Should Theresa May fail to achieve what she set out to achieve in Brussels, there is a good chance that her deal will be defeated again in the House of Commons.
|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.|
Today UK manufacturing data will be under the spotlight. Analysts are expecting UK manufacturing activity to have slowed again in February, dropping to 52, down from 52.8 in January on a scale where 50 separate contraction from expansion.
The dollar was in demand in the previous session as investors cheered data that showed that the US economy slowed by less than what analysts were expecting in the fourth quarter of 2018. The US GDP grew 2.6% year on year in the final months of last year. This was better than the 2.2% growth that analysts had pencilled in. Delving deeper into the numbers, business investment increased by more than forecast. This suggests that economic growth could be stronger for longer. The dollar moved higher on the back of the strong data.
|How does strong jobs data boost the currency?|
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the goods and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.|
Today investors will continue to watch the US economic calendar as inflation data and manufacturing figures could dictate price movement in the dollar.
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.