The pound US dollar exchange rate fell over 2% across the previous week. The pair closed on Friday at US$1.2722, marginally above the low of US$1.2713, the weakest rate that the level has traded at since June last year.
|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 fell lower across the previous week as investors eyed UK Prime Minister Theresa May’s exit and as Brexit talks fell apart.
Theresa May has been under mounting pressure to resign after her failure to deliver on Brexit. Last week, Theresa May finally caved in to the powerful Conservative backbenchers, confirming that she would set out the timetable for her departure after another vote on her Brexit deal. Ministers are due to vote on Theresa May’s Brexit deal for a fourth time at the start of June. Analysts are not expecting ministers to vote the deal through. The big concern for pound traders is that a pro-Brexit candidate, such as Boris Johnson, will replace Theresa May. This means that a hard deal Brexit could be back as an option, whilst a softer Brexit option could be fading.
The breaking down of cross-party Brexit talks on Friday has further fuelled concerns that the PM’s Brexit deal will not make it through Parliament and that Theresa May could be ousted shortly after.
|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 week could be another volatile week for the pound. Brexit will remain in focus and reports have surfaced that Theresa May is due to make a bold announcement in a last ditch attempt to get MP’s on her side.
The dollar charged higher in the previous week, rallying across the five days as investors looked towards the US dollar for its safe haven status. An escalation in the US — Chinese trade dispute has returned as a top concern for investors. Investors are growing increasingly concerned that the US — Chinese trade dispute will have a serious impact on global growth, sending it lower. In times of geopolitical stress investors buy into the dollar, the reserve currency of the world.
The dollar has proven to be sensitive to headlines and commentary from President Trump and media outlets linked to the Chinese government. This could continue across this week.
Investors will also be looking towards the release of the Fed’s minutes from its latest policy meeting for further clues over what the Fed plans next. Hints of a looser policy could weigh on the dollar, whilst a more hawkish Fed could boost the buck.
|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.|
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