The pound—US dollar exchange rate tumbled to a low of $1.3033 on Brexit uncertainties, before pushing northwards to close 0.2% higher at US$1.3075. The pound was once again climbing versus the dollar in early trade on Tuesday.
|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.|
U.K. Prime minister Theresa May continued talks with the leader of the opposition party, in an attempt to break the Brexit deadlock. In order for a Brexit deal to be approved by Parliament a cross party agreement will be needed. Theresa May’s team have offered a compromise to The Labour leader. However, it doesn’t include any of the key demands such as the customs union, meaning that it will most likely be rejected and the Brexit impasse continue. Brexit uncertainty pulled the pound lower.
|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.|
Sterling pared losses later in the session as the House of Lords passed the bill preventing the UK leaving the EU without a deal. This means that the U.K. will not legally be able to crash out of the EU, taking one of the most economically damaging Brexit options off the table.
Today there is no high impacting UK data to distract investors from the Brexit drama. Theresa May will meet with German Chancellor Merkel and France’s Macron ahead of the EU summit on Wednesday. Theresa May will be looking to drum up support for the short extension that she will request. Germany is unlikely to be a problem. France on the other hand is adopting a hard line to further Brexit negotiations.
The dollar edged lower in the previous session as concerns over the health of the global economy eased. Demand for the safe haven dollar declined following recent strong economic data from China and the US last week.
Moves into the safe haven dollar could be on the increase again if investors become nervous over President Trump’s tariff threats to Europe. The US President has threatened tariffs on European helicopters, wine and cheese in retaliation for an ongoing dispute over Boeing and Airbus.
Trump is willing to wait for the World Trade Organisation’s finding later this summer before he applies tariffs. Should investors grow nervous that Trump is looking to start another trade war, they could buy into the safe haven dollar.
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Inc., Currency Live or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. Consult our risk warning page for more details.
This article was initially published on TransferWise.com from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.