The pound plummeted to a two-year low versus the dollar on Wednesday, before paring some losses later in the session. The pound US dollar exchange rate recovered from a nadir of US$1.2383 to close 0.2% higher at US$1.2433. The pound continued to move higher 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.|
Brexit concerns continue to dominate movement in the pound. The pound sunk lower on Wednesday following remarks by the British Brexit Secretary Steve Barclay that the risk of a no deal Brexit was being underestimated. His comments came as investors grow increasingly concerned that Boris Johnson’s Brexit strategy will lead the UK to a disorderly Brexit in a few short months.
Economists and business leaders alike have frequently asserted that a no deal Brexit would be the worst-case scenario for UK businesses, the British economy and the pound. Investment banks have also weighed into the debate with Morgan Stanley predicting parity between the pound and the dollar in the event of a no deal Brexit.
|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.|
UK inflation data offered some support to the pound, as did the news that the House of Lords backed a move that would make a no deal Brexit more difficult. The House of Lords backed a move that would stop the next Prime Minister from closing down Parliament to push Brexit through. In order to become law this still needs to pass through the House of Commons where it is likely to face tougher opposition from pro-Brexit MP’s.
Demand for the dollar took a hit in the previous session after a slew of weak housing data. The construction of new houses dipped in June and housing permits also declined to the lowest level in two years. The data indicated that the US housing market was losing momentum despite lower mortgage rates. This unnerved investors, particularly given the strong recent jobs data. Various economic data have given conflicting signs regarding the state of the US economy. However, the bigger picture of the Fed looking to cut rates is keeping pressure on the dollar
Today investors have turned their attention back towards the US — Sino trade dispute. The lack of progress being achieved by Trump and President Xi is unnerving investors. There has only been one phone call and no meetings since the G20 summit as the two sides struggle to overcome their differences. An ongoing trade dispute could weigh on the US economy, pulling the US dollar lower.
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