GBP/USD: Trade Wars & Brexit Concerns Drive Pound Lower vs. Dollar

The euro moved higher versus the dollar in early trade and has managed to hold onto those gains. The euro US dollar exchange rate is once again targeting US$1.10. The pair hasn’t managed to push meaningfully through US$1.10 for over 2 weeks.

The euro was broadly in favour on Wednesday. Whilst there was no data due to be released investors cheered comments by Mario Centeno, the head of the eurozone finance ministers (Eurogroup), who said that those eurozone countries that have the fiscal space should invest to boost he economy. His comments were in line with those by ECB President Mario Draghi last month.

The European Central Bank (ECB) eased monetary policy at the September meeting. At the same time the central bank called on individual governments in the bloc to increase fiscal spending to boost the economy. The prospect of higher spending and the subsequent inflationary pressure boosted the euro.

Euro investors will now look ahead to the release of the minutes of the September monetary policy meeting.  Should the central bank adopt a more dovish stance and talk about further rate cuts, the euro could decline.


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.


Fed Minutes Up Next

The US dollar has ticked lower in early trade on Wednesday amid fading optimism over a resolution to the ongoing US — Sino trade dispute. The Trump administration’s decision to impose visa restrictions on Chinese officials and the blacklisting of Chinese firms has put a distinctly negative tone on the meeting before it has even started.

The US economy has shown signs of cooling, particularly in the manufacturing sector amid the ongoing US — Chia trade dispute. Failure for the two sides to move towards a deal could mean further weakness for the US economy. As a result, the dollar is moving lower.

Investors will now look ahead to the release of the minutes from the US Federal Reserve monetary policy meeting. At this meeting the Federal Reserve cut interest rates by 0.25%. However, the central bank did not indicate that there were any more cuts to come this year. According to the CME Fedwatch tool investors are 85% confident that the Fed will cut interest rates again in October. If the minutes reveal the Fed to be less dovish, the dollar could advance.


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 EUR = 1.12829 USD

Here, €1 is equivalent to approximately $1.13. This specifically measures the euro’s worth against the dollar. If the U.S. dollar amount increases in this pairing, it’s positive for the euro.

Or, if you were looking at it the other way around:

1 USD = 0.88789 EUR

In this example, $1 is equivalent to approximately €0.89. This measures the U.S. dollar’s worth versus the euro. If the euro number gets larger, it’s good news for the dollar.


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