The pound is extending gains versus the dollar in early trade on Thursday. The pound US dollar exchange rate ended the previous session 0.2% higher at US$1.3181.
|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 USD Here, £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 GBP In 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 managed to power higher versus the dollar despite bleak Brexit headlines. The latest reports suggest that very little progress has been made between the UK and Brussels in negotiations. The changes to the Irish backstop arrangement that Parliament sent Theresa May back to Brussels to achieve haven’t been agreed. Both sides admit that the talks have been difficult. Theresa May will return this weekend in a last-ditch attempt to get more concessions from the EU.
As it stands Theresa May will have problems pushing her deal through Parliament next week. The chief whip has commented that he does not believe that Theresa May has the numbers necessary to get her Brexit deal agreed to in the House of Commons. Whilst there is considerable uncertainty over the expected direction of Brexit, pound traders are growing in confidence that a no deal Brexit could be taken off the table in a vote on 13th March.
|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 there is little in the way of high impacting UK economic data. Investors could look towards the Halifax house price report. Analysts expect a small increase in prices. However, with the housing market subdued ahead of Brexit, analysts expect house price growth to be minimal.
The dollar was broadly out of favour in the previous session as investors digested disappointing data. Firstly, data showed that the trade deficit increased to a record level in 2018. Despite President Trump’s America First policy, imports soared. Secondly US ADP employment figures were worse than analysts estimated. The number of jobs created in the private sector was 183,000. This was below the forecast 189,000. Whilst the difference is not that great, investors are concerned that the US labour market could be starting to slow.
Market participants will need to wait until tomorrow’s non farm payroll report for a more complete picture of the health of the US labour market. Analysts expect the US jobs market to slow slightly but still be strong enough to continue tightening.
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