After rising early on in the previous week, the pound fell in the second part of last week. As a result, the pound finished the previous week at US$1.3037, approximately the same level that it started.
|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.|
Data showing the activity in the UK manufacturing sector picked up to a 13-month high, boosted the pound at the beginning of the previous week. The pound was unable to hold onto gains following disappointing service sector data and amid Brexit developments.
Ministers in the House of Commons failed to break the Brexit deadlock in Westminster. Parliament voted against all four alternative options to Theresa May’s Brexit agreement. Meanwhile, Theresa May started talks with the leader of the opposition party, Jeremy Corbyn in a bid to break the Brexit impasse. The PM believes that a cross party Brexit agreement is needed in order for a Brexit deal to be voted through Parliament.
Theresa May requested another short extension to Article 50. Pound traders were not confident for a positive response from the EU and the pound dropped lower. Brussels have openly said that they are in favour of a longer extension of around a year. It is impossible to say whether they will agree to a shorter extension. The uncertainty sent the pound lower.
Today the House of Lords will vote on the Yvette Cooper Bill. The bill will stop the UK from leaving the EU without a deal. Should the Lords agree, the pound could rally as a no deal Brexit would be removed as an option,
|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 climbed higher on Friday following a solid US jobs report. 194,000 jobs were created in March, evidence of the US job market rebounding after a particularly weak February. February saw just 20,000 jobs created. March’s stronger reading comes amid concerns of slowing momentum in the US economy. Several months of mixed data has left investors hesitant over whether the Federal Reserve will hike interest rates again anytime soon. In fact, investors had been growing increasingly convinced that the Fed might cut rates later this year.
|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.|
Any stronger data that could positively influence the Fed’s interest rate outlook could help boost the dollar. US factory orders will be closely watched today. However, Wednesday’s inflation data will be the most closely scrutinized data release.
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