Dollar strength sent the pound US dollar exchange rate tumbling for a third straight session on Wednesday. The pound US dollar exchange rate shed 0.2% to close at US$1.2629.
|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.
There was no high impacting UK economic data to distract investors on Wednesday, so Brexit and the Conservative leadership race remained in full focus. The opposition party Labour have said they will support a second referendum to avoid a no deal Brexit. Meanwhile the candidates battling it out for Tory leadership and to become prime minister are mainly Eurosceptic. This means that potential Brexit outcomes are increasingly polarised. Brexit uncertainty is increasing, and this is weighing on the pound.
|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 investors will look ahead to UK consumer confidence data. Consumer sentiment is important because the UK economy is so dependent on the service sector and consumer spending. Analysts are expecting consumer confidence to tick higher to -12 up from -13 where is has been stuck for the past three months. Even if consumer sentiment has improved slightly it is still strongly negative owing to Brexit uncertainties. Weak consumer sentiment means that consumers are less likely to spend, particularly on big purchases. This is not good news for the UK economy.
The dollar has gained ground this week as tensions between the US and China escalate. The US have said that they are not ready to make a trade deal, whilst China is considering banning rare earth exports. These are materials that are needed to produce a wide range of products including gasoline, catalytic converters, magnates, cameras, washing machines, the list goes on. China’s readiness to ramp up the trade war unnerved investors. The dollar benefited from its safe haven status, climbing higher.
Today investors will look towards a slew of US data to assess the health of the US economy. The US GDP first quarter revision will be closely watched. Analysts are expecting economic growth to be revised down marginally to 3.1% from 3.2%. Whilst this is still strong economic growth, the downwards revision could knock demand for the dollar slightly. Other data points of interest include jobless claims and pending home sales.
|Why does poor economic data drag on a country’s currency?|
|Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.|
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