Home GBP GBP/USD: Pound Volatile As Brexit Uncertainty Persists

GBP/USD: Pound Volatile As Brexit Uncertainty Persists

21st May 2019

After rallying to a high of US$1.28, the pound US dollar exchange rate dropped almost 100 points to a low of US$1.2715. This is the lowest level that the pound has traded at since early January.

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.

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 continued to trade around a four-month low as Brexit concerns and domestic political fears lingered. Cross party Brexit talks came to an end on Friday with no agreement. However, reports suggest that UK Prime Minister Theresa May could be on the verge of making a bold announcement in order to boost her Brexit agreements, before a fourth vote in Parliament. Political analysts say that Theresa May will offer a closer customs relationship with the European Union, in order to attract more Labour votes in the House of Commons.

This move could also infuriate the pro- Brexit members of her cabinet, who have said that they will resign should Theresa May adopt this strategy. Until there are signs of progress towards a potential Brexit solution, the pound could remain under pressure.

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.

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 investors to digest. Instead investors will look towards inflation data on Wednesday. Analysts are forecasting that inflation will tick up slightly to 2.2% year on year in April, exceeding the Bank of England’s 2% target. Even so, this is unlikely to change the BoE’s policy outlook in the near term.

Will US Home Sales Data Help Lift The Dollar?

The dollar trended marginally lower on Monday after rallying across the previous week. The escalating US — China trade dispute had lifted demand for the dollar. The dollar is the reserve currency of the world so in times of increased geopolitical tensions investors tend to buy into the dollar. In short the dollar rallied owing to its safe haven status.

Today, dollar traders will continue to watch for any further developments in the US-China trade dispute. Any signs of further escalation could lift the dollar. Attention will also turn towards the release of US home sales data. Analysts are expecting home sales to continue rebounding in April, after rising to a 16-month high in March. Strong data could help lift the dollar higher.

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