After a volatile session, the pound US dollar exchange rate concluded Thursday, 0.2% lower at US$1.2328. The pair has lost over 1.2% across the past two sessions. The pound is edging higher cautiously higher versus the dollar on Friday.
Just one week ago the pound was trading at 2-month highs versus the dollar as investors believed that the UK would find a path to avoid a no deal Brexit. Fast forward a week, Boris Johnson’s proroguing of Parliament has been ruled unlawful, ministers are back in session in Westminster and the pound is trading 250 points lower versus the dollar.
The pound has retreated as the uncertainty over where Brexit is heading increases. Following the ruling of the Supreme Court that Boris Johnson acted illegally, the PM has showed no signs of remorse. If anything, he is appearing more determined than ever to push Brexit through amid chaotic scenes in Parliament
When questioned in Parliament over whether he, Boris Johnson would request an extension to Article 50, he responded “No”. However, the PM also said that he wouldn’t break the law. This has left pound investors nervous that Boris Johnson and his team are looking for a legal loophole to get around the Benn Act, which legally requires the PM to request an extension. The fear of a no deal Brexit pulled the pound lower.
| 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. |
The pound is finding support in early trade this morning following better than forecast UK consumer confidence figures. However, the uplift may not last as attention turns to Brexit talks.
Dollar Investors Watch Impeachment Developments & GDP
The dollar advanced in the previous session as investors continued watching political developments in Washington and after data showed that the US economy grew at 2% in the second quarter.
The final revision of the US GDP was as analysts forecast, at 2%. Whilst this is an ok number, the business investment element of the report was concerning, slipping the most since 2015. Even so, the dollar remained well supported.
Today the dollar could receive mixed signals from data releases. On the one hand, analysts forecast that US durable goods orders declined -1.25 in September, down from a 1.8% increase the month prior. Weak data often drags on the dollar.
On the other hand, analysts predict that the Federal Reserve’s preferred measure of inflation, the PCE will tick higher to 1.8%. Higher inflation could deter the Fed from cutting rates again this year and therefore would boost the dollar.
| 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. |
| 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. |
