GBP/USD: Pound Falls From 10 Month Peak As Extension Vote Eyed

The pound rallied after UK Parliament voted against a no deal Brexit. The pound US dollar exchange rate charge northwards to a high of US$1.3381. This is the highest that the pair have traded at since June last year. The pound is moving lower in early trade on Thursday.

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 was the best performing currency of its major peers, after Parliament rejected the idea of leaving the EU without a deal. Ministers have ruled out what businesses and economists considered to be the worst-case scenario. The House of Commons will now vote again today.

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 is the final Brexit vote in this series. Parliament will vote on whether to delay Brexit. As it stands the UK will leave the EU on 29th March. Should ministers vote in favour of pushing the exit date back, they UK government will need to request permission from the EU. Permission will only be granted if all 27-member states agree.

Whilst a short extension will prevent the UK from crashing out of the EU without a deal, it would also extend uncertainty for businesses. A longer extension could pave the way for an improved Brexit deal or a second referendum.

Dollar Dipped As Data Fuelled Economic Slowdown Concerns

The dollar drifted lower in the previous session after economic data supported the Federal Reserve’s neutral stance in interest rates. Producer prices, which measure prices at wholesale level, only increased at a very slow rate in February. Consumer prices were equally stagnant in February. This suggests that inflationary pressures across the board were muted.

Durable goods, managed o post the biggest increase in six months. However, this was insufficient to change investors outlook of the US economy. Recent data has been weaker providing further reason for the US central bank to keep rates on hold. With investors pushing back expectations for a rate rise, the dollar dipped lower.

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.

Today investors will continue watching US economic data. Releases such as US new home sales, continuing jobless claims and import and export data will provide clues as to the health of the US economy ahead of the Fed’s rate decision next week.

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