UK election fears and upbeat US manufacturing data sent the pound US dollar exchange rate plummeting on Thursday. The pair dropped 0.6% to close at US$1.2838. The pound is edging lower in early trade.
Speaking before Parliament, UK Prime Minister Boris Johnson called for an election. The prospect of more political instability hit demand for the pound. Johnson has called for an election 12th December, in return for more time to discuss the Brexit bill.
This is the third time that the Prime Minister has called an election. He needs the support of two thirds of Parliament. In other words, he needs the backing of opposition MP’s. The ball is in the leader of the opposition, Jeremy Corbyn’s court.
An election will prolong the political uncertainty strangling the country and economy. It would not be supportive of the pound. As a result, the pound fell.
|How does political risk have impact on a currency?|
|Political risk drags on the confidence of consumers and businesses alike, which means both corporations and regular households are then less inclined to spend money. The drop in spending, in turn, slows the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. Signs that a country is politically or economically less stable will result in foreign investors pulling their money out of the country. This means selling out of the local currency, which then increases its supply and, in turn, devalues the money.|
Should Mr Johnson lose a general election, this opens up the possibility of a second Brexit referendum. However, this would also go hand in hand with hard left labour government under Jeremy Corbyn, which could also be bad news for the pound.
Boris Johnson has tabled a motion for an election to be voted on by MP’s on Monday.
Today investors will be waiting to see if the EU have decided on the length of Brexit extension that they are willing to grant. A short extension would make an election impossible before Brexit.
Dollar Rises As Manufacturing Fears Ease
The dollar was in demand in the previous session after a gauge of US factory activity unexpectedly increased in October. This is the second straight month that manufacturing pmi has increased. The flash pmi printed at 51.5 in October, ahead of the 51.1 reading from the previous month. The better than forecast data lifted the dollar whilst quelling concerns over the health of the US economy.
Whilst the better than forecast manufacturing data is an improvement, manufacturing is likely to continue to weigh on the US economy given the ongoing US — China trade dispute and slowing global trade.
Data will remain in focus today as investors digest US consumer confidence figures. Analysts predict that household sentiment has remained constant in October.
|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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