Pound Supported Against Euro by Hopes of a Smooth Brexit

The pound pushed through US$1.24 and booked its best one-day performance against the dollar in 7 months on Thursday. The pound US dollar rallied to a high of US$1.2469 before easing slightly into the close. The pair is advancing in early trade on Friday.

Brexit deal optimism sent the pound northwards in the previous session. In a last-ditch attempt to break the Brexit stalemate, Prime Minister Boris Johnson met with his Irish counterpart Leo Varadkar for private talks. Following the talks, the Prime Ministers had sounded surprisingly optimistic saying that there was a pathway to a Brexit deal. He also said that he believed that a Brexit deal could be done before the October 31st deadline.

Reports from Sky News say that Britain proposed a watered-down Free Trade Agreement (FTA) with the EU, in an attempt to end the Brexit impasse and get a deal done by the Halloween deadline. An FTA between the EU and the UK would remove tariffs on all goods between the two areas. It would go some way to resolving the contentious Irish border issue.

Brexit talks between the UK and the EU will resume today. The positive reaction by the Irish PM Leo Varadkar is seen as crucial in persuading other EU leaders to accept the deal. Investors will remain glued to Brexit headlines. The further that the Boris Johnson moves from a no deal Brexit, the stronger the pound could rally.


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.


Trade Optimism Weighs On Dollar

The dollar was broadly out of favour in the previous session as investors digested weak US inflation figures and amid trade deal optimism.

US inflation, as measured by consumer price index, remained steady at 1.7% in September. This was just below the 1.8% increase year on year that analysts had forecast. The data supports investors’ belief that the Federal Reserve will cut interest rates again this month.


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.


Trade talks were the central focus on Wednesday as the 13th round of negotiations began in Washington. Trump has said the talks are going very well. As geopolitical tensions are easing, demand for the dollar and its safe haven properties are falling.

Trade talks will remain under the spotlight today with each headline likely to be closely scrutinised. US Consumer confidence could also attract attention.


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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