GBP/USD: Pound Steady As Investors Watch Political Developments

A stronger dollar on Tuesday pushed the pound US dollar exchange rate lower on Tuesday. The pair closed 0.1% lower at US$1.2659.

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 USD

Here, £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 GBP

In 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.

Following heavy falls in the previous week, the pound is trading in a more controlled manner so far this week. With no more political or Brexit bombshells to knock sterling lower, investors continue to digest last weeks developments.

UK Prime Minister Theresa May is due to leave office on 7th June. Recent comments from the PM that the direction of Brexit is now up to the next Prime Minister suggests that she will not be putting her Brexit Agreement before Parliament for a fourth and final vote before she leaves.

There are now 10 Conservative candidates which have put themselves forward for the position as leader of the Conservatives and Prime Minister. The candidates are laying out their plans for Brexit. So far Boris Johnson, Jeremy Hunt and Dominic Raab have all said that they would try to renegotiate the Brexit deal, particularly the contentious Irish backstop. The EU have repeated said that they are not willing to renegotiate the Brexit deal. Brexit uncertainty could keep the pound depressed whilst the Conservative leadership battle continues.

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.

There is no high impacting UK economic data to grab investors’ attention. The focus will remain on politics, the leadership battle and Brexit.

Dollar Strong On Soaring US Consumer Confidence

The dollar strengthened in the previous session as investors cheered strong US data. Figures showed that US consumer confidence rose by more than what analysts were expecting, hitting the highest level since November.

Consumer confidence increased to 134.1 in May, significantly higher than the 130 analysts had been forecasting. Americans are feeling the best about current economic conditions in 18 years. This is largely down to a solid labour market and rising wages. High consumer confidence bodes well for consumer spending. This is good news for the US economy which is so dependent on consumer spending.

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 has managed to hold onto most of its gains overnight as investors are looking toward its safe haven properties once again. Fears of the US — Sino trade dispute causing a global economic downturn are keeping demand or the world’s reserve currency high.

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