GBP/USD: Dollar Strengthens As Investors Look To G20

The pound was well matched versus the US dollar in the previous session. The pound US dollar exchange rate ended Wednesday’s session at US$1.2695. This was approximately the same level that it started the session at. The pound is drifting lower in early trade on Thursday.

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 under pressure in the previous session as investors digested comments from Bank of England Governor Mark Carney. In an appearance before the Parliamentary treasury select committee Mark Carney warned that the central bank might cut interest rates in the case of a no deal Brexit. This is the clearest signal yet that Mark Carney has given over what could happen in a no deal scenario. The prospect of a rate cut weighed on demand for the pound.

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.

His comments come just a week after the BoE said that it may have to raise interest rates if the economy performed as the central bank predicts. The BoE forecast on the basis of a smooth Brexit, with a deal in place. With pro Brexit Boris Johnson the favourite to win the Conservative leadership race, the probability of a no deal Brexit has risen considerably.

The pound could come under further pressure later today with the release of the Gfk consumer confidence data. Analysts are expecting consumer confidence to have ticked lower in July amid ongoing Brexit uncertainty. A less confident consumer spends less. This is bad news for the UK economy.

The dollar was edging higher in early trade on Thursday as investors look ahead to the G20 meeting in Japan this weekend. President Trump is due to meet China’s President Jinping Xi for a side-line meeting on Saturday. The two leaders are due to discuss ongoing trade dispute. Hopes of a trade deal between the two powers have increased after US Treasury Secretary Steve Mnuchin said a deal was 90% done.

A deal between the US and China could help the US and globally economy stave off a downturn. Recent economic data and the Federal Reserve have been bracing themselves for an economic slowdown amid the ongoing trade dispute. Should this be the case the Federal Reserve might not need to cut interest rates. This would boost the dollar.

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