GBP/USD: Pound Falls Ahead Of Crucial Brexit Week

The pound fell steadily versus the US dollar across the previous week. A mixture of weak UK economic data and Brexit anxieties sent the pound 1.4% lower, to close at US$1.3017. The pound was extending losses against the US currency as the new week begins, dropping below US$1.30 to a three week low.

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.

UK data painted a dismal picture of the UK economy just weeks before Brexit. UK construction activity contracted in February. Activity in the UK manufacturing and service sector had almost ground to a halt in February, as businesses delay decisions until there is more clarity over Brexit.

This week is a big week for Brexit and the pound. UK ministers will take a series of votes which will determine the future of Brexit. On Tuesday 12th March UK Parliament will vote on UK Prime Minister Theresa May’s Brexit deal for a second time. Political commentators expect the Brexit deal to be defeated for a second time, although by a smaller margin.

Should this be the case, the House of Commons will then vote on a no deal Brexit on Wednesday. If this is defeated, there will be a vote on Thursday to decide whether to delay Brexit by extending Article 50. Any signs that the UK is moving towards a softer Brexit could support the pound. Signs that the UK is heading for a no deal Brexit could send the pound sharply lower, back towards the post Brexit referendum levels of US$1.20.

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.

Dollar Falls From Highs On NFP Data

The dollar was well supported across the previous week. However, US jobs data on Friday pulled the dollar off weekly highs. The US labour report showed that just 20,000 jobs were created in the US in February. This is well below the 180,000 that analysts were expecting. Yet whilst the headline number was eye catchingly low, average wages increased to 3.4% annually. This is the fastest rate of growth since April 2009. Higher wage growth increases inflationary pressures. Additionally, the unemployment level dropped to 3.8%, down from 4%. This is another positive sign for the US economy.

How does the non-farm payroll (NFP) affect the US dollar?
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 good 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 up the currency’s worth.

US retail sales data will be under the spotlight today as will an appearance by Federal Reserve Chair Jerome Powell. Investors will be keen to see whether the Fed is easing back on dovish rhetoric.

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