Brexit optimism lifted the pound to a two-month high versus the US dollar. The pound US dollar exchange rate rallied across the previous session, closing 0.4% higher and is continuing to charge northwards in early trade on Friday. The pair hit an intraday high of US$1.2582, a level last reached in mid-July.
The pound surged following reports that European Commissioner Jean-Claude Junker thinks that a Brexit deal could still happen. The pound was the strongest performer versus a group of 10 peers (G-10) after Juncker said that he was doing everything possible to avoid a no deal Brexit, which he considered would be “catastrophic”.
This is the most optimistic that Juncker has sounded regarding a Brexit deal for months. As investors reassess the probability of avoiding a no deal Brexit the pound rallied. Juncker’s comments come following a report by the OECD detailing the impact that it believes a disorderly no deal Brexit will have on the UK economy. The OECD forecast a 3% drop in UK GDP which would see the UK tumble into recession.
Today investors will focus on Brexit talks between EU chief negotiator Michel Barnier and UK Brexit Secretary Stephen Barclay. Investors are clinging to every headline, as they try to ascertain if an economically damaging no deal Brexit can be avoided.
|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 Softens On Quiet Data Day
The dollar surrendered Wednesday’s post FOMC gains in the previous session, despite encouraging data. The dollar dipped even as figures showed that the US labour market remained resilient. US jobless clams increased by 208,000 in August, below the 213,000 analysts forecast. Existing home sales were also upbeat, increasing 1.3% month on month in August, well ahead of the -0.7% decline forecast.
After a very busy week for data and central bank announcements, today is much quieter. The focus will likely be on developments in the Middle East. US Secretary of State Mike Pompeo has been in Saudi Arabia discussing a response to Iran’s attacks on Saudi oil infrastructure. Any hints of a strong retaliation could raise fears of an all-out war in the Middle East. Any signs of increased geopolitical tensions could boost the dollar, the reserve currency of the world, as investors look towards safe havens.
|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.
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