The pound US dollar ended Thursday’s session flat on the day. The pair had rallied to a peak of US$1.2368 but the pound was unable to hold those gains. Sterling is rallying versus the dollar in early trade on Friday.
| 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 release of the government Yellowstone documents had little impact on the price of the pound yesterday. The government documents covered possible outcomes in the case of a no deal Brexit. Rioting on the streets, a shortage of food and reduced medical supplies were just some of those covered.
News that the DUP could shift their red lines over the Irish backstop could offer support to the pound today. Northern Ireland’s DUP, which props up the government said that they would accept abiding by some E.U. rules after Brexit. Previously the party had said that they weren’t willing to consider any plans that would treat Northern Ireland politically or economically differently from the rest of the UK. This shift in stance could break the current impasse and eventually lead to a new Brexit deal. The pound is advancing as hopes that the UK will leave the E.U. with a deal increase.
| 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 Investors Look To US Retail Sales
The dollar recovered after a weak start in the previous session. Data showing that core US inflation was stronger than what analysts were expecting boosted demand for the dollar. Inflation, as measured by consumer price index ticked lower to 1.7% year on year. However, core inflation which excludes more volatile items such as food and fuel actually increased solidly in August, leading to the largest annual gain in a year.
Today investors will look towards US retail sales data and consumer confidence data for further clues over the health of the US economy. These releases come just ahead if the Federal Reserve’s monetary policy meeting next week. Analysts expect US retail sales to slip but remain positive in August. A decline would come after strong retail sales figures in June and July. Meanwhile analysts predict that consumer confidence will tick higher after last months’ heavy fall.
Even if US data does impress today, as it did yesterday, analysts do not believe that this increase will deter the Federal Reserve from cutting interest rates when they meet next week. A move by the ECB on Thursday to ease monetary policy has cemented invest expectations of a rate cut by the Fed.
| 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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