Fears that Brexit talks were as good as over sent the pound sharply lower on Tuesday, whilst trade jitters boosted the dollar. The pound US dollar exchange rate closed down 0.6% at US$1.2220. The pound was rebounding in early trade on Wednesday.
A phone call from German Chancellor Angela Merkle informing Boris Johnson that a Brexit deal was now very unlikely pushed the pound to a one month low. With tempers high and the clock ticking Brexit talks are on the verge of completely breaking down.
In a bid to try to keep deal hopes alive after a serious clash with Angela Merkle, Prime Minister Boris Johnson has agreed to meet with Irish Prime Minister Leo Varadkar for more talks later this week. Boris will be hoping to convince the Irish premier to help hammer out a viable deal.
As a no deal looks increasingly likely the pound sunk lower. There are reports that the EU could offer a Brexit extension until next summer. However, Boris Johnson will be looking at a no deal or a general election as his preferred alternatives, neither of which is enticing for pound investors.
| 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 Jitters Boost Dollar Overshadowing Fed
The focus for the dollar has been on trade talks this week. As trade negotiations are about to begin for the 13th round, the headlines are remarkably negative. On the day the Chinese delegation arrived in Washington, Trump blacklisted 28 Chinese tech companies. China’s Liu He has said that he will not negotiate on Xi’s behalf and the Chinese will also leave a day earlier than originally planned. Trying to agree to any deal with that amount of negativity swirling before talks have even started will be extremely challenging.
Investors sold out of riskier assets across the financial markets. In times of elevated geopolitical tension investors often look towards the dollar, the reserve currency of the world, for its safe have status. As a result, the dollar pushed higher.
Federal Chair Jerome Powell gave a speech yesterday which was considered negative for the dollar. He was more pessimistic about the economy than he had been a week earlier, as he acknowledged softer data. He also said the Fed is contemplating buying treasury bonds again to support the system.
Today investors will continue watching trade headlines closely.
| 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. |
