The pound declined versus the data boosted dollar on Thursday. The pound US dollar exchange rate dropped to a session low of US$1.3063, snapping a three-day winning streak. The pound was edging cautiously higher versus the dollar in early trade on Friday.
|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.|
Earlier in the week, the House of Commons passed a bill to prevent the UK leaving the EU without a deal. The pound barely reacted to the announcement as investors had assumed that this would be a natural step forward, after ministers voted against a no deal Brexit.
UK Prime Minister Theresa May and leader of the opposition Jeremy Corbyn continued discussion to break the Brexit deadlock in Parliament. Investors are still waiting to see whether they are making sufficient progress. Signs of a softer Brexit could boost the pound.
|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 negative impacts of Brexit were highlighted in economic data on Thursday. The number of new cars bought, dropped to a six year low in March. Brexit uncertainty is hitting consumer confidence. As a result, consumers are not purchasing large expensive items. This is bad news for the UK economy. The weak car data comes just days after data showed that the UK’s dominant service sector was in contraction.
Today there is no high impacting UK economic data, so Brexit will remain in focus. Theresa May will most likely request a long extension to Brexit, with the option to leave the EU in May should she agree a deal with Jeremy Corbyn.
Demand for the dollar was strong in the previous session. US jobless claims dropping to a 49 year low supported the greenback. The number of Americans filing for unemployment benefits dropped to 202,000 for the week ending March 30th. This is the lowest level since 1969.The data shows that the US labour force is still strong, despite growing concerns over slowing economic growth.
Attention will now turn to the US non farm payroll report. This is the most closely watched data release for the month. Analysts predict that 180,000 jobs were created in March, significantly higher than the 20,000 created in February. A strong reading could boost the dollar.
|How does the non-farm payroll (NFP) affect the US dollar?|
|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 good 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 up the currency’s worth.|
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