Brexit and a more cautious Federal Reserve dominated movement in the pound US dollar exchange rate last week. The pair closed 0.6% lower at US$1.3212, after recovering from a low of US$1.3006 on Thursday. The pound was extending losses in early trade on Monday.
|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.|
Pound investors ignored impressive UK economic data in the previous week. Unemployment unexpectedly fell to 3.9% , wage growth remained at 3.4%, the strongest level since the financial crisis, inflation ticked higher to 1.9% and retail sales showed that consumers were still spending despite Brexit uncertainty. Usually data of this strength would lift the pound.
Instead, Brexit pessimism pulled the pound lower across most of the previous week. The EU granting the UK an extension to Article 50 for another 2 weeks, until April 12th helped lift the pound towards the end of the week, as a hard no deal Brexit on Friday has been avoided.
Brexit will continue to drive the direction of the pound. UK Prime Minister Theresa May has lost a lot of authority. Reports over the weekend suggest that ministers are backing Theresa May amid rumours of a plan to oust her.
Theresa May will attempt to push her Brexit deal through Parliament again this week, in a third meaningful vote. Should she fail to get ministers to back her deal, Theresa May will need to decide whether to accept a no deal Brexit and leave on May 22nd. Alternatively, she will need request a long extension from the EU.
|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 Federal Reserve surprised the markers with a more dovish tone in its latest monetary policy meeting. The Fed are now not expecting to hike interest rates this year. The Fed is sticking with its more patient approach which it first introduced in January.
The reason for the Fed reducing its path of interest rate hikes is owing to slowing US growth. Data from the US points to a slowing in momentum in the economy. Market investors are now pricing in a rate cut by the Fed as being as much as a possibility as a rate hike.
|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.|
Whilst there is no high impacting US data due for release today, investors will be looking at some important figures later in the week. US inflation numbers on Friday will be the most closely watched.
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