GBP/USD: Pound Above $1.25 On Hopes Of Averting A Disorderly Brexit

The pound ended the previous week 0.4% lower versus the US dollar. Brexit fears weighed on the pound whilst US dollar investors assessed the probability of a deep rate cut by the Federal Reserve. The pound plummeted to US$1.2382, its lowest levels in over 2 years, before rebounding to close above $1.2500 on Friday. The pound was edging cautiously higher versus the US dollar in early trade at the start of the new week.

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.

Brexit fears intensified at the beginning of the previous week, hurting demand for the pound. However, stronger than forecast retail sales and political developments boosted the pound later in the week. The UK Parliament moved to block the next Prime Minister from suspending Parliament to push Brexit through on 31st October. Front runner to the Conservative leadership battle has refused to rule out suspending Parliament, so the news was well received by pound traders.

The UK economic calendar is quiet this week. This focus will be firmly on politics with the Conservative leadership race drawing to a conclusion on Tuesday. Boris Johnson is the bookies favourite to win. Process will then be put into place for the winner to take over from Theresa May. Any fresh comments from the winner over Brexit could move the pound. Hopes that Europe could work with Boris Johnson to avoid a disorderly Brexit was lifting the pound in early trade at the start of the week.

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.

Fed Rate Cut Bets Remain Centre Stage

The dollar dropped sharply towards the end of last week as New York Fed Williams commented that the Fed should act quickly and sharply. This was interpreted by the markets as the Fed considering a much deeper cut than the 0.25%, potentially a 0.5% interest rate cut. The CME Fed watch tool probability of a 0.5% rate cut in July increased from mid-20% to 59%.

The US economic calendar is relatively quiet, with US GDP on Friday the main highlight. Investors will also continue to watch to see how US earning season is playing out. Strong corporate earnings can boost demand for the US dollar, as investors need dollars to buy US shares. However, weaker earnings could see investors pull their money from the US stock market reducing demand for the dollar. Facebook, Amazon and Alphabet, Google’s parent company are all dur to report this week.

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