Better than forecast US data combined with optimistic comments from Trump regarding US — Sino trade talks send the dollar higher on Monday. The pound US dollar exchange rate dropped to a low of US$1.2208. The pair is advancing 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.
The pound edged lower at the beginning of the week. Whilst Monday was a public holiday in the UK, the pound was still moving. With no economic releases Brexit rhetoric was under the spotlight. EU Council President Donald Tusk has adopted a more pessimistic view towards the chances of the UK and the EU achieving a deal than other European leaders. Late last week the pound was supported by comments from German Chancellor Angels Merkel and French President Emmanuel Macron and their willingness to listen to new proposals from UK Prime Minister Boris Johnson regarding the Irish backstop. Donald Tusks’ comments weighed on the pound at the start of the week.
Today pound investors are looking towards leader of the opposition Jeremy Corbyn as he prepares for cross party talks in an attempt to find a way to block a no deal Brexit.
There are just 65 days remaining until the UK is due to leave the EU with or without a deal. Brexit remains the most significant driving force for the pound because the health of the UK economy depends greatly on whether there is a deal or not.
This week there is no high impacting UK economic data due to be released meaning that Brexit rhetoric will continue in focus.
|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.|
Strong Data And Trade Lift Dollar
The dollar was in favour in the previous session following strong US durable goods figures and amid hopes of the US and China heading towards a trade agreement.
US durable goods increased by 2.1% in July, well ahead of the 1.2% that analysts had predicted. This is the second straight month that durable goods orders have increased. Market participants consider this a positive sign for the economy because durable goods tend to be expensive therefore consumers purchase them when they feel confident about the economy. This is a sign that the US consumer is still not being affected by the US — Sino trade dispute and manufacturing slump.
The bigger boost for the dollar came from optimistic comments from President Trump that the US and China could be restarting trade talks. Investors are concerned that the US — Sino trade dispute is starting to negatively impact on the global and US economy. Any signs that the recent escalation in the dispute could be easing boosts the dollar as investors push back the probability of further rate cuts from the Federal Reserve.
|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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