GBP/USD: Pound Hits 3 Month Low vs. Dollar On Brexit Woes

The pound trended lower across Wednesday. It was the worst performing currency versus its peers, dropping to a 3-month low of US$1.2827 versus the dollar. The pair pared some losses towards the close and is trading steady at US$1.2850 in early trade on Thursday.

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 out of favour in the previous session as investors grew increasingly concerned that Brexit would not be resolved. Pound investors are growing more convinced that Prime Minister Theresa May’s Brexit deal won’t make it through the House of Commons when she attempts to push it through a fourth time. Theresa May has set a date for the 3rd of June for another vote on her Brexit deal. However, with the opposition party Labour, refusing to back the deal in its current form, the chances of Theresa May getting it through Parliament are slim at best.

The question is what happens next if the deal does fail for a fourth time? Analysts expect Theresa May to be pushed out. She will most likely be replaced by a hard-line Brexiteer. This means that the chances of a soft Brexit are fading. As a result, the pound declined.

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 there is no high impacting economic data for pound investors to focus on. Brexit developments, or the lack of, will continue to drive price movement in the pound.

Dollar Steady As Trade War Fears Ease

The dollar traded broadly flat, although it was in higher demand that pound. On the one hand easing trade war tensions are lifting the dollar. On the other, weaker than forecast US retail sales data dragged on the greenback.

US retail sales unexpectedly declined month on month in April by -0.2%. Analysts had been expecting an increase of 0.2%. Economists view retail sales as an indication for future inflation. Softer retail sales indicate a softer inflation outlook, which gives the Federal Reserve less reason to hike interest rates and could even encourage the Fed to cut rates. As a result, the dollar pared some earlier gains.

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 dollar had traded higher earlier in the session after Trump indicated a softer stance on ongoing trade disputes. Not only did his administration sound optimistic of a future trade deal with China, Trump also said he was postponing the decision to slap trade tariffs on EU auto imports. A trade war would have a negative impact on the US economy, therefore dollar traders showed signs of relief when trouble was averted.

Today there are several pieces of medium impact data that will be released. Trade dispute headlines will remain key to dollar movement.

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