Despite falling 0.4% on Friday, the pound US dollar gained 1% across the first week of September. The pound US dollar exchange rate rallied to a high of US$1.2354 before closing at US$1.2282. The pair is edging lower in early trade on Monday.
|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 experienced high levels of volatility across the previous week as Brexit events unfolded. After sinking to a 2-year low, sterling then rallied to a 6-week high.
Whilst Parliament successfully passed a bill to prevent a no deal Brexit, uncertainty still lingers. Investors await confirmation of the bill’s royal ascent. However, Boris Johnson’s team suggested over the weekend that the PM could ignore the legislation, potentially taking the fight to the Supreme Court. In other words, a no deal Brexit could still happen even if the anti — hard Brexit bill becomes law.
In a week of chaos in Westminster, Boris Johnson suffered two humiliating defeats, sacked 21 high profile MP’s, saw his brother quit the party and endured the resignation of his works and pensions minister Amber Rudd. However, his team believes that his aggressive Brexit strategy is winning the support of Leavers across the county.
With nothing set in stone, this week is set to be another key week for Brexit and the pound. Questions surrounding no deal Brexit, the possibility of an election and the extent of political chaos in Westminster will continue to drive movement in sterling.
|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.|
Today investors will also look towards a busy day for UK economic data. These include GDP, industrial production and trade balance.
Dollar Dipped Post US Jobs Report
The dollar dropped versus most of its peers on Friday, although not the pound. Demand of the dollar took a hit after weaker than forecast US jobs report. The non-farm payroll report is the most closely watched economic data release across the month. The data showed that only 130,000 jobs were created in US in August. This was less than the 160,000 that analysts had forecast. Unemployment remained steady at 3.7% and wages grew 3.2% year on year. July’s job creation headline figure was also revised downwards.
Whilst the US labour market continues to grow, the rate of growth has slowed considerably. Given the international backdrop and concerns over the US — Sino trade dispute caution is starting to creep in and could be making firms increasingly cautious about hiring.
|How does the non-farm payroll (NFP) affect the US dollar?|
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the goods and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes up the currency’s worth.|
This week the big data release will be on Thursday — the US inflation reading. Other data points of interest include US Michigan sentiment index.
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