The pound concluded the previous week over 2% higher versus the US dollar. The pound US dollar exchange rate climbed to a 9 month high of US$1.3385 after Parliament voted against a no deal Brexit. The pound was edging lower versus the dollar at the start of the new week.
|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.|
Last week the UK house of commons voted against Prime Minister Theresa May’s Brexit deal in a second meaningful vote. Although this time it was by a slightly smaller majority of 149 votes. Ministers also voted against leaving the EU in a no deal Brexit which lifted the pound to a 9-month high. Ministers also voted in favour of extending Article 50. Theresa May intends to bring her vote back to the House of Commons for a third meaningful vote this week.
Should Theresa May’s Brexit deal pass, the Prime Minister will request a short technical extension for Article 50. This would delay Brexit by a few months. If Theresa May’s Brexit deal is defeated for a third time, the terms of the extension will be left up to the EU.
The EU want to know there is a good reason in order to grant an extension. For example, a workable plan or a second referendum. Hopes of a second referendum and Brexit potentially not ever happening kept the pound elevated last week.
Brexit developments will remain in focus as Theresa May continues to try to build support for the deal. These developments and the continued uncertainty will keep the pound volatile for another week.
|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 US dollar was out of favour in the previous week amid weaker economic data releases. US empire manufacturing figures and industrial manufacturing numbers fell short of analysts expectations on Friday. Industrial production increased just 0.1% and manufacturing rose from -0.5% to -0.4%. These were short of analysts’ expectations and disappointed investors.
The softer numbers came following a move lower in inflation earlier in the week.
With recent US data disappointing investors, the US dollar could be in line for further losses should this week’s data point to a continued weakening of the US economy. The Federal Reserve will be less willing to hike rates amid softening conditions.
|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.|
Investors will be watching closely Tuesday’s US factory orders number, Friday’s PMI projections and most importantly Wednesday’s Federal Reserve policy announcement.
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