The pound failed to capitalise on a weaker US dollar at the start of the new week. The pound US dollar exchange rate was well matched across the previous session closing just marginally lower at US$1.2738. The pound was moving higher in early trade on Tuesday.
|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 were focused on politics in the previous session. Boris Johnson, Brexiteer and favourite to win the Conservative leadership battle gave an interview in an attempt to switch attention away from his personal life to his policies. Boris Johnson has expressed on numerous occasions his aim to remove the UK from the EU with or without a deal. On Monday he continued with this rhetoric.
However, the continued Brexit talk came at the same time that a government funded academic think tank reported that Brexit has hurt the UK economy so far and more damage is highly likely. The UK in a Changing Europe assessed Brexit’s actual and future impact on inflation, productivity, public finances and imports and exports. The report showed that the impact of Brexit has been overwhelmingly negative.
Today investors will look towards the Confederation of British Industry sales data. Analysts are expecting sales to have dropped -3 in June. This is an improvement from May when -27 was recorded. This would still show that the UK consumer was not spending in the face of Brexit uncertainty. This is bad news for the UK economy.
The US dollar was broadly weaker on Monday, although was evenly matched versus the weaker pound. Dollar investors continue to sell out of the dollar following the Federal Reserve’s dovish shift last week. Last week the US central bank opened its door to an interest rate cut possibly as soon as July.
|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.|
Today investors will be watching the US consumer confidence data. When consumers are confident, they spend more which is good news for the economy. Analysts are predicting that consumers are losing confidence. If so, this would support the Fed’s assessment of the outlook for the economy. A weak reading could send the dollar lower.
Events in the Middle East could support the dollar. Tensions have been escalating in the Middle East between the US and Iran, following the downing of a US drone in international airspace last week. In times of elevated geopolitical tension investors can look towards the dollar for its safe haven qualities.
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