The pound advanced in the previous session amid growing hopes of a softer Brexit. Meanwhile the dollar was a touch weaker following disappointing data. The pound US dollar exchange rate rallied to a high of US$1.3198 before easing lower into the close. The pair finished the session 0.2% higher at US$1.3164. The pound was moving higher 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.|
UK Prime Minister Theresa May meeting with the leader of the opposition party, Jeremy Corbyn, in an attempt to end the Brexit deadlock in Parliament, fuelled hopes of a softer Brexit. The opposition party, Labour, could look to keep the UK in the customs union or even support a second referendum. A softer version of Brexit is more favourable to UK businesses, the economy and therefore the pound.
Meanwhile Parliament also acted to prevent a potentially chaotic no deal Brexit. Should Theresa May and Jeremy Corbyn fail to come to an agreement, Parliament have acted to force the PM to request an extension to Article 50 from the EU rather than crash out with no deal. As the prospect of a hard Brexit fades, the pound moved higher.
|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.|
UK data pulled the pound off session highs. UK service sector PMI figures showed that activity in the UK’s most dominant sector unexpectedly contracted in March. The PMI fell to 48.9, down from 51.3 in February. The figure 50 separates contraction from expansion.
Both the service sector and the construction sectors are in decline. The manufacturing sector is just in expansion, but that’s thanks to stockpiling for Brexit. Overall the UK economy looks to have stagnated in the first quarter.
Today there is no UK economic data. Investors will focus on Brexit updates. Any sign of progress in talks between Theresa May and Jeremy Corbyn could push the pound higher.
Demand for the dollar dipped in the previous session on the back of weaker economic data. The US ADP private payroll report printed below what analysts had predicted. Just 129,000 private jobs were created in March, blow the 180,000 pencilled in by city analysts. Weak job creation points to weak inflationary pressures so keeps demand for the dollar low.
|How does strong jobs data boost the currency?|
|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 goods 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 the worth of the currency higher.|
US ISM non-manufacturing service sector data was also weaker than what analysts had forecast. This fuelled concerns over the health of the US economy, pulling the dollar lower.
Today the focus will remain on US economic data and the labour market. Should US jobless claims come in higher than analyses forecast, the dollar could come under further pressure.
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