The pound eked out a positive finish versus the dollar on Friday. However, the 0.1% increase was insufficient to put the pound ahead of the US dollar across the week. The pair closed down 0.3% at US$1.2695. The dollar was advancing versus the pound is early trade in Monday, bringing the exchange rate lower.
|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.
The pound was broadly under pressure in the previous week as concerns over Tory leadership favourite’s “Do or Die” Brexit plan unnerved investors. The hardline Brexit approach from Boris Johnson, the candidate most likely to take the helm at No. 10 Downing Street come 22nd July means that a no deal Brexit is looking increasingly probable. Concerns over the impact of a no deal Brexit were fanned by the Bank of England Governor Mark Carney when he made an appearance before the Parliamentary Treasury Select Committee. Mark Carney said that an interest rate cut could be needed in a no deal Brexit scenario. The prospect of a lower interest rate sent the pound lower.
|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.|
This week investors will continue scrutinizing the last two remaining Conservative candidates in the leadership race and their policies towards Brexit and spending. Additionally, pound trades will look towards PMI data for manufacturing, construction and the al important service sector. Today sees manufacturing pmi’s in focus. Analysts are forecasting a slight increase to 49.5 in June, up from 49.4. However, this is still a contraction in the sector as it is below the key 50 level.
The dollar moved higher across the previous week after the Federal Reserve toned down their cautious stance. US economic growth at 3.1% in the first quarter also calmed nerves over the health of the US economy.
The dollar has started the new wee on the front foot, after a weekend packed with geopolitical events. The most important for the dollar was that President Trump and China’s Xi Jinping have agreed to a trade truce when they met at a bilateral meeting to the G20. Given that the dispute had been slowing on the global economy, including the US, investors are now starting to price in a potentially more optimistic ending. This would be more advantageous for the US economy and could mean that the Fed may not have to cut interest rates.
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