The pound soared versus the US dollar in the previous session. Brexit and political developments boosted the pound whilst the dollar dipped lower. The pair closed 1.3% higher at US$1.2246. The pair is seen easing back 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 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.
Sterling soared in the previous session as the UK stepped back from the brink of a no deal Brexit and as a general election was also avoided. After an intense day of Brexit debates Boris Johnson suffered a humiliating double defeat. MP’s backed legislation to prevent the UK leaving the EU without a deal. In a vote of 327 to 299 Boris Johnson has been forced to go back to the EU and request an extension to Brexit until 31st January. This bill must now be passed in the House of Lords to become law.
The second humiliating defeat came as MP’s blocked the prime minister’s attempt to call a snap election. The double defeat comes as MP’s grew increasingly angry with Boris Johnson’s handling of Brexit. As a result, he is effectively trapped in No. 10 Downing Street by a hostile Parliament. Political analysts believe that the opposition will agree to a General Election next week once the anti — no deal bill becomes law.
Despite the elevated levels of political instability, the pound soared. This is because the probability of a hard no deal Brexit has declined.
|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.|
Dollar Dips On Easing Geopolitical Tensions
The dollar was broadly out of favour in the previous session as investors continued to digest weak manufacturing data released earlier in the week and as global geopolitical risks receded. Brexit, Hong Kong and even the US — China trade dispute all took a turn for the better. Given that the dollar is a safe haven this means investors tend to buy into the dollar in times of elevated geopolitical tensions. The reverse is also true when geopolitical tensions ease.
Today and tomorrow are big days with regards to US economic data. Friday sees the release of the closely watched US non-farm payroll. However, today’s releases include US jobless claims, factory orders and non-manufacturing activity and are all likely to catch investors attention. Analysts expectations are encouraging and point to improvements in readings. This could help boost the dollar.
|Why does strong economic data boost a country’s currency?|
|Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.|
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