The pound managed to hold its ground versus the dollar on Monday. The pound US dollar exchange rate closed the session at US$1.2520. This is approximately the same level that the pair started the session at. The pound is moving lower 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.|
Brexit uncertainty and growing recession fears are keeping demand for the pound in check. Whilst there was no fresh economic data at the start of the week, investors were still digesting the hat-trick of poor pmi’s last week. The data showed contraction or stagnation in all three major sectors meaning that a contraction in the second quarter is expected by most analysts. The possibility of a recession, two straight quarters of contraction, is also growing amid ongoing Brexit uncertainty.
Brexit is the key driving factor for the pound. The favourite to win the Conservative leadership battle, Boris Johnson, upped his no deal Brexit rhetoric over the weekend. However, the pound was finding some solace from the fact that there is growing opposition to a no deal Brexit in Parliament. This varies from MP’s insisting that they would resign in these of a no deal Brexit, to other MP’s exploring 30 plus legislative ways to avoid a no deal Brexit.
Economists, and even the Governor of the Bank of England, have frequently spoken of the damage that a no deal Brexit could cause to the British economy. Therefore, any sign that a no deal could be avoided tends to offer support to 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.|
The dollar remained relatively steady on Monday following the strong rally on Friday. The strong US non-farm payroll report resulted in investors easing back their expectations of a rate cut. With no high impacting data released yesterday or today, analysts are expecting investors to wait patiently for Federal Reserve Jeremy Powell’s appearance before the House on Wednesday.
Investors are expecting Jerome Powell to give some indication of what direction the Federal Reserve will take for monetary policy. Prior to Friday’s non-farm payroll reading, the Fed stood ready to cut interest rates, possibly as soon as July. Investors will be watching closely to see whether this will still be the case. The dollar could move higher should Jerome Powell indicate that the Federal Reserve will wait for more data before cutting rates.
|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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