The pound finally moved higher versus the dollar on Thursday. However, this was more to do with US dollar weakness than any notable pound strength. The pound US dollar exchange rate dropped to a low of US$1.2605 a fresh 4 month low, before recovering to US$1.2660.
|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 broadly out of favour in the previous session as investors braced themselves for a pro-Brexit replacement for Theresa May. Prime Minister Theresa May has so far still refused to hand in her resignation. However, pound traders are assuming that she will be leaving sooner rather than later.
Today the PM will meet with Graham Brady the Chairman of the 1922 Committee of backbenchers. He will advise her that she will be forced out if she doesn’t set a leaving date. Should Theresa May conclude that she will not be able to push her Brexit deal through Parliament, she may resign in the coming days. However, reports suggest that Theresa May will stay in power until early June, after President Trump’s visit. The leadership battle takes place over a six week period, during this time volatility in the pound could pick up.
|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.|
In addition to developments in Westminster, pound traders could glance towards UK retail sales data. Analysts are expecting UK retail sales to remain elevated at 4.3% year on year in April, although this is down slightly from the stellar 6.2% in March. A strong reading could help lift the pound.
|Why does strong economic data boost a country’s currency?|
|Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.|
The dollar gave up some of its recent gains in the previous session after a strong run of wins. Investors had been buying into the dollar for its safe haven status as geopolitical tensions between the US and China intensified.
US data was also under the spotlight on Thursday and failed to impress. US manufacturing activity dived to a 9 year low on trade war concerns. The manufacturing pmi recorded 50.6 in May, down from 52.6 in April. This is just the latest sign that the US – China trade war is negatively impacting the economy. The weaker data pulled the dollar southwards.
Today US data will remain under the microscope as investors look towards durable goods data. Analysts are predicting another fall, which could turn up fears over the health of the US economy and pull the dollar lower.
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