In a relatively quiet session, the pound US dollar exchange moved steadily lower on Monday. The pair closed 0.2% lower at US$1.2127. The pair is seen edging lower once again 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 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.
With no high impacting data to distract traders, Brexit was the key driving force behind the pound on Monday. The pound grinded lower as investors digested reports of food and medical shortages, trade disruption and even civil unrest in the case of a no deal Brexit following a leaked government report. Whilst economists have often warned over the negative impact of a no deal Brexit, the report made for grim reading, unnerving pound investors.
|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.|
A speech by leader of the opposition, Jeremy Corbyn did little to boost the pound. He called for a vote of no confidence and pledged to do whatever it takes to avoid a no deal Brexit. The Labour leader promised a second referendum if another general election was held this year.
Today there is no high impacting data meaning that Brexit will remain very much in focus. Prime Minister Boris Johnson is heading to speak to Germany’s Angela Merkel and French President Macron. Political analysts expect the Prime Minister to tell them that the EU must offer a new deal or face the UK leaving the EU without a deal.
Dollar Investors Look Towards Busier Second Half Of The Week
The dollar started the week in a quiet manner. Last week recession fears, escalation of US — Sino trade tensions and a slew of better than forecast US economic data drove dollar movement. At the start of this week, optimism grew over a US — Sino trade deal, recession fears eased, however market participants remain convinced that the Federal Reserve will cut interest rates when they meet in September.
Market analysts are not expecting big moves in the dollar until later in the week. Wednesday sees the release of the minutes from the Federal Reserve monetary policy meeting. Thursday sees the release of US PMI figures and on Friday a speech by Federal Reserve Chair Jerome Powell could provide further clues as to whether the Fed will cut rates in September or not.
|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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