Brexit chaos saw the pound slip versus the dollar on Friday. The pound—US dollar exchange rate close 0.4% lower at $1.3151. However, the pound has clawed back those losses 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 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.|
After a night of drama in Westminster, there is still no clarity on which direction Brexit could be heading in. UK Prime Minister Theresa May offered to step down from her position earlier than she intended to, if it means that she can get her deal through Parliament. This appeared to be enough for some Eurosceptics to switch alliance and support her deal. However, the DUP are still refusing to vote in favour of Theresa May’s Brexit deal. Meanwhile Speaker Bercow could attempt to prevent the vote reaching Parliament, relying on a 400-year Parliamentary rule.
Later, ministers voted down all 8 different Brexit options in indicative votes. A second referendum got the most votes overall but still lost 295 to 268. Other options rejected included a Norway style option and a no deal Brexit. After all the action last night, plans for the UK leaving the EU remain in chaos.
Given that level of uncertainty surrounding Brexit, the pound remains relatively well supported at these levels. This is because investors are still confident that the UK won’t leave the EU without a deal and will eventually move towards a softer version of Brexit. With little in the way of economic data, Brexit will remain the central focus 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.|
The dollar strengthened in the previous session as central banks across the globe turned more cautious. Concerns over slowing global growth is a key theme for financial markets. The Federal Reserve turned more cautious on its outlook at the start of the year and reaffirmed that dovishness at its most recent meeting. Yesterday the Reserve Bank of New Zealand and the European Central Banks doubled down on their cautious rhetoric. As other central banks around the globe turn more cautious, investors look towards the dollar as a safe haven.
Today US GDP will be in focus. Analysts are expecting economic growth to have slipped to 2.4% quarter on quarter in the final months of the year. This is down from 2.6%. A weak reading could weigh on demand for the dollar.
|Why does poor economic data drag on a country’s currency?|
|Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.|
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