Brexit woes pulled the pound lower on Monday, whilst US—Sino trade dispute developments were in focus for dollar traders. The pound US dollar exchange rate dropped to a low of US$1.2943, its lowest level since 30th April.
|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.
Cross party Brexit talks between the government and the Labour party have entered the sixth week and have as good as stalled. The Labour party is insisting that any Brexit agreement must have a second referendum attached as part of the package. The government is adamant that it doesn’t want to go down the route of another people’s vote. This means the two sides are struggling to advance.
Senior Conservative Ministers will advise Theresa May to end the talks. Fears are growing that Labour’s demands could cause a devastating divide in the Conservative party. The cabinet will meet today to analyse developments in the talks. There is a growing sense that time is running out for Theresa May to deliver on Brexit.
|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.
Today investors could also look towards UK job data. Analysts are expecting the unemployment level to remain steady at 3.9%. However, the pound could come under pressure as wage growth, a closely watched component of the report is expected to show that wage growth slowed in the three months to March to 3.4%, down from a decade high of 3.5% in the three months to February. Weaker wage growth could pull the pound lower.
|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.
The dollar held steady in the previous session even as the US—Sino trade war heated up. Despite threats from Trump not to do so, China retaliated to the US tariff hike by slapping trade tariffs on $60 billion worth of US imports. The move comes after the US increased trade tariffs to 25% from 10% on $200 billion worth of Chinese imports.
Usually the dollar would increase in value in times of increased geopolitical tensions thanks to is safe haven policy. However, investors are growing increasingly concerned that the escalating trade dispute could negatively impact the US economy and result in the Fed cutting interest rates this year. This is a downward pressure on the dollar. As a result of the conflicting impacts on the greenback, the dollar is trading flat.
|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.
The is little in the way of economic data today for investors to digest. Instead they will have to wait for US retail sales figures on Wednesday.
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.