Brexit fears weighed heavily on the pound on Monday, whilst the dollar received a boost from trade headlines. The pound US dollar exchange rate trended lower across the session pushing below US$1.23 to close at US$1.2287. The pair is edging higher in early trade on Tuesday.
Fears of a no deal Brexit returned to haunt pound investors in the previous session, pulling sterling lower. As Brexit talks resumed in Brussels, Prime Minister Boris Johnson received a boost from the Scottish courts. The court rejected a plea to force the Prime Minister to follow the so-called Benn Act, the Act which requires the PM to request an extension to Brexit, in the case that a deal has not been agreed by 19th October. This technically takes the UK step closer to a no deal Brexit, which hit demand for the pound.
|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.|
Economist have been clear that a no deal Brexit is the worst-case scenario for the pound. However, the UK economy continues to show signs of strain amid ongoing Brexit uncertainty. The British Retail Consortium (BRC) revealed that retail sales slid -1.3% year on year in worst September since 1995.
Whilst consumer spending had been a bright spot in the UK economy amid Brexit uncertainty, this no longer appears to be the case. Non-essential items were worst hit as shoppers rein in their spending. This is bad news for the UK economy and suggests that the British economy could slow further even if a no Brexit deal is avoided.
Trade Headlines Lift Dollar
The US dollar advanced in the previous session as investors followed trade headlines closely. With no US economic data to focus on and with US — China trade negotiations due to start later in the week, investors have been jumping from headline to headline attempting to gauge the probability of a trade deal being achieved.
China have said that they are ready to sign a deal on the specific points that both sides agree on. Beijing have also said that they are not willing to discuss reforming Chinese industrial policies or government subsides. On the one hand this is good news, in that a deal could be signed very soon. However, the deal will not be as broad, or as far reaching as market participants were hoping for. The dollar advanced because an agreement could help the US economy which is showing signs of slowing.
|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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