Home GBP GBP/USD: Pound Above $1.29 As EU Brexit Extension Awaited

GBP/USD: Pound Above $1.29 As EU Brexit Extension Awaited

24th October 2019

The pound trended higher on Wednesday as Parliament put the brakes on Brexit. The pound US dollar exchange rate pushed 0.3% higher to close at US$1.2910, snapping a two-day losing streak. The pair is edging lower in early trade on Thursday.

The pound advanced on Wednesday, even as Brexit developments paused. Parliament has accepted Boris Johnson’s Brexit deal, but rejected his plan to fast track it through Parliament. The Tories are now divided as what to do next. The party is deeply split over whether to push for a general election or attempt to push Brexit through, just at a slower pace.

Downing Street won’t make any decision over what to do until the EU responds to the UK’s request for a delay to Brexit. The EU are keeping Boris Johnson hanging on. EU leaders are keen to grant the extension but are struggling to agree for how long. France is keen to grant a short extension until 15^th November. The rest of the countries in the EU want to give 3 months.

Downing Street will not decide their next move until the EU have given their decision. Quite simply if the EU grant a short extension, there is no time for an election.

The pound will continue to be driven by Brexit developments.

Dollar Looks To PMI & Durable Goods Data

The dollar has had a quiet week so far. Trade headlines have been few and far between and the US economic calendar has been sparse. That is set to change today, as investors will digest a slew of economic data. The most closely watched will be US durable goods orders and PMI data.

Analysts are predicting that activity in the manufacturing sector slowed again in October as the fallout from the US — Sino trade war continues to be felt. However, the service sector is expected to tick higher, dispelling concerns that the slump in manufacturing is spilling over into the service sector.

Investors will be watching for any unexpected signs of weakness. Soft data last week pulled the US dollar lower as it reinforced investor expectations that the Fed will cut rates later 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.

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.