The pound US dollar exchange rate experienced elevated levels of volatility for a second straight session on Thursday. The pair spiked to a high of US$1.2933 before dropping sharply to a low of US$1.2752 and clawing back losses, to close in positive territory. The pair is holding steady in early trade on Friday.
The pound soared on news that the UK and EU agreed a Brexit deal. However, the gains were short lived as investor attention quickly turned to the likelihood of Boris Johnson being able to get his deal through Parliament. The Northern Irish DUP, whose vote is critical to Boris Johnson to win a majority, immediately rejected the deal. Leader of the opposition party Jeremy Corbyn said that the deal was worse than what Theresa May agreed; a deal that was overwhelmingly rejected. The odds appeared to be stacking up against Boris Johnson and pulling the pound lower.
However, President of the EU Jean-Claude Juncker then said that there will be no extension to Brexit. This has backed rebel Remainer MP’s into a corner. The choice is now Boris Johnson’s deal or no deal. This has lifted the chances of the deal winning the majority needed in the Parliamentary vote tomorrow. This is supporting the pound in early trade today.
|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.|
Dollar Investors Shrug Off Chinese GDP Disappointment
Concerns over the health of the US economy weighed on demand for the dollar on Thursday. Earlier in the week a dismal reading for US retail sales showed that the US consumer, the central pillar to the US economy was starting to falter. Yesterday, weak figures from industrial and manufacturing production elevated these concerns. Industrial production declined -0.4% month on month. Manufacturing production dropped -0.5% month on month. This was the lowest reading in 4 months and fuelled concerns that the slump in manufacturing was deepening.
The dollar was also holding steady in early trade on Friday after a mixed bag of data from China. Chinese GDP dropped to just 6%, the worst reading in three decades. However, industrial production increased by an impressive 5.8%, beating expectations. Dollar traders have barely reacted to the readings.
|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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