GBP/USD: Pound Rallies vs Dollar As Brexit Deal In Sight

The pound US dollar exchange rate was well matched across most of the previous week. The pound moved higher mid-week and managed to hold onto those gains. The pair ended the previous week 0.3% higher at US$1.2333. The pound has dropped in early trade on Monday.

Disappointing economic data weighed on the value of sterling at the beginning of the previous week. Data showed that the UK construction sector, manufacturing sector and dominant service sector all slipped deeper into contraction in September. The gloomy data pointed to a second consecutive quarter of economic contraction. This means that the UK is tipping into a technical recession. The weak numbers hit the pound.

Sterling picked up mid-week after Prime Minister Boris Johnson revealed his final Brexit offer to the European Union.  Pound investors were quick to buy into Boris Johnson’s optimism. The EU haven’t been so eager. In stead they have labelled his plans unworkable and have said that the UK needs to come back with a better offer by the end of this week. Then, EU chief negotiator Michel Barnier will decide if there is any possibility of a deal before the EU Summit.

Whilst the EU are playing down the possibility of a deal, Boris Johnson is doubling down on his no deal Brexit rhetoric. Brexit optimism is quickly fading, and the pound is trading lower in early trade on Monday.


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.


A Quiet Start For The Dollar Ahead Of Fed Powell’s Speech Tomorrow

The dollar experienced a mixed bag of data across the previous week. On the one hand, manufacturing and service sector PMI’s and private payroll figures were very disappointing, increasing fears that the US manufacturing slump is worsening and spilling over into other sectors.

However, Friday’s US jobs report, the non-farm payroll was not as poor as market participants had been expecting, which gave the dollar a small boost on Friday. Following the poor US data across the week, analysts had been expecting headline job creation in September to be significantly below the 146,000 jobs expected. Instead it was only slightly lower at 135,000. Unemployment also dropped to a 50-year low, helping ease fears over the health of the US economy.

Today there is no high impacting US economic data. Investors will look ahead to an appearance by Fed Chair Powell on Tuesday and the release of the minutes from the Federal Reserve monetary policy meeting on Wednesday. Any signs that the Fed are contemplating another rare cut this year could send the dollar lower.


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.


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