The pound fell from a of high of US$1.3132 to a low of US$1.2036 across the session on Wednesday. Brexit and US — China trade war concerns drove movement in the pound and the dollar respectively.
|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.|
The pound was weak across the board in the previous session. The pound came under increasing pressure as Government ministers threw cold water on the prospects of a Brexit deal agreement being reached with the opposition. Cross party Brexit talks are stalling once again and the chances of the two sides delivering an agreement are fading.
|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.|
This means that the UK government is looking to what comes next. The UK will need to take part in European elections later this month. This will cost the UK around £150 million and will almost certainly prove to be toxic for Theresa May. The PM is now clinging to hopes that she can secure a deal with Labour before British MEP’s take their seats on July 2nd. This sequence of events will only highlight Theresa May’s inability to deliver on Brexit. There are doubts growing around Westminster as to whether Theresa May will make it that far, with high powered Tories keen to change the rules so that the PM can face another vote of no confidence and be ousted.
|How does political risk have impact on a currency?|
|Political risk drags on the confidence of consumers and businesses alike, which means both corporations and regular households are then less inclined to spend money. The drop in spending, in turn, slows the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. Signs that a country is politically or economically less stable will result in foreign investors pulling their money out of the country. This means selling out of the local currency, which then increases its supply and, in turn, devalues the money.|
There is no high impacting data today. Brexit and political developments will remain a central driving force for the pound.
The dollar was in favour once again in the previous session. Investors continued to move into the dollar for its safe haven qualities after Trump threatened to escalate the trade dispute with China. The dollar is the reserve currency of the world so investors buy into the dollar in times of increased geopolitical tensions. Chinese officials are now expected to attend negotiations in Washington this week, however investors are nervous as to how much progress they will make. The two sides clearly have more work to be done before a trade deal is close to being agreed.
There is no high impacting US economic data due for release today. Investors will stay glued to trade dispute headlines. Signs that US — China tensions are easing could see the dollar lose ground.
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