The pound US dollar exchange rate soared its highest level in almost a week in the previous session. A mix of Brexit optimism and US recession fears saw the pair advance to a 6-day high of US$1.2414 before giving back some of those gains. The pound US dollar exchange rate closed 0.3% higher at US$1.2342. The pair is holding steady in early trade on Friday
The pound gave up gains towards the end of the previous session as Brexit optimism faded. The EU remain “unconvinced” over Prime Minister Boris Johnson’s latest Brexit proposal, which doesn’t eliminate a border in Ireland. The EU have given the Prime Minister one week from today to come up with an alternative.
According to sources close to the Prime Minister, he does have a plan B. This involves the original Irish backstop, just with a time limit; something which is unlikely to wash well with the EU either.
Today there is no high impacting UK economic data. Early next week the calendar is sparse too. Brexit will remain the principal driving force for 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.|
All Eyes On The NFP
The dollar dropped in the previous session following the release of the US ISM non-manufacturing figures. The data showed that US service sector activity declined to 51.5 points, the weakest level since 2016. This was a significant decline from August’s 56.4 points. Whilst the sector remains in expansion, there are signs that the manufacturing slump is bleeding over into the dominant service sector.
The weak data comes following disappointing manufacturing and private job creation data earlier in the week, boosting fears that the US is heading towards a recession.
Investors will now look towards the US jobs report, the non-farm payroll report. This is the most closely watched macroeconomic statistic of the monthly economic calendar. Both investors and the Federal Reserve use it to gauge the state of the US labour market and more broadly the health of the US economy.
|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.|
Analysts are predicting that 140,000 jobs were created in September and average wages increased 0.3%. Should the figures miss estimates, the dollar could fall sharply as investors will assume another rate cut from the Federal Reserve is on the way to shore up the economy.
|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.