one-us-dollar-bank-note - USD

The pound and US dollar were well matched in the previous session. The pair spent much of the day hovering around the break-even level, with the pound gaining only later in the session. The pair closed 0.2% higher at US$1.2566.

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.

Pound traders spent the session looking ahead to the second round of votes for the Conservative party leadership contest. The 6 remaining candidates had to achieve a minimum of 33 vote in order to remain in the contest.

Favourite Boris Johnson won with 126 votes out of a possible 313. Rory Stewart gained support, emerging as the rival with most momentum. He won 37 votes, up from 19 in the previous round. Dominic Raab was the only candidate to fail to achieve the 33 votes required as his party punished him over his plans to shut Parliament to achieve Brexit.

The pound perked up after the results of the second vote as Boris Johnson’s rivals gained. Boris Johnson is still the clear favourite but any signs that he has tougher competition is supporting the pound. This is because it provides optimism to traders that a no deal Brexit could be avoided.

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 pound trades will continue digesting last night’s results as well as look ahead to UK inflation data due for release. Analysts are expecting inflation to have ticked down to 2% from 2.1%. The reading comes just before the Bank of England (BoE) rate announcement tomorrow.

Federal Reserve In Focus

The dollar was broadly lower in the previous session as investors look towards the Federal Open Market Committee policy announcement. Market participants are not expecting the Federal Reserve to hike interest rates this month. However, owing to weak economic data amid the ongoing US -China trade dispute, market participants are growing increasingly convinced that the Fed will cut interest rates possibly as soon as July, if not in September.

So, whilst analysts are not expecting a rate cut, they expect to see a slight position shift from the Fed as they prepare the markets for a cut. Should the Fed sound more cautious over the health of the US economy and signal towards a rate cut, the dollar could fall further.

Why do interest rate cuts drag on 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. Lower interest rate environments tend to offer lower yields. So, if the interest rate or at least the interest rate expectation of a country is relatively lower compared to another, then foreign investors look to pull their capital out and invest elsewhere. Large corporations and investors sell out of local currency to invest elsewhere. More local currency is available as the demand of that currency declines, dragging the value lower.

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