Pound Versus US Dollar Holds Steady as Brexit Negotiations Begin

19.06.17
4 minute read
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The pound U.S. dollar exchange rate finished the previous week approximately where is started, after considerable volatility during a very busy week for the pound. The pound U.S. dollar exchange rate is holding steady at $1.2775.

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 U.S. 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 U.S. dollar’s worth versus the British pound. If the sterling number gets larger, it’s good news for the dollar.

The pound managed to recover losses at the beginning of week that had stemmed from the UK Conservative Party’s disappointing performance during the UK General election. Luckily for sterling, conservative leader and Prime Minister Theresa May’s reduced mandate following the election increased hopes of a soft Brexit for the UK.

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.

Brexit negotiations start today, and although no big political clashes are expected, nerves are weighing on the pound. The first few weeks of meetings between UK Brexit Minister David Davis and chief EU negotiator Michael Barnier will be to set the stage, handle practicalities and put agendas in place. The more complicated, controversial talks will then happen in a few weeks-time.

The long, drawn out process of negotiating Britain’s exit from the European Union is set to weigh on the pound. This is particularly the case since Theresa May has lost substantial negotiating power following her disastrous performance in the UK general elections. These elections saw her party, the Conservatives, lose their working majority in Parliamentary. A coalition-style agreement with Northern Ireland’s Democratic Unionist Party (DUP) is set to be sealed by May in the coming days to ensure a majority in the Commons. However, May’s position in Brussels is still considerably weaker.

This political uncertainty and May’s weakened mandate means a softer Brexit could be more likely. In a televised appearance over the weekend, UK Chancellor of the Exchequer Philip Hammond boosted hopes of a soft Brexit which would focus on trade and jobs following Britain’s departure from the European Union. Soft Brexit hopes could offer support to the pound over the medium term.

Weak data on Friday keeps U.S. dollar demand low

The dollar is seen recovering from a weaker session on Friday. A positive stance from the U.S. Central Bank earlier last week wasn’t enough to change negative sentiment towards the dollar for very long. Although the U.S. Federal Reserve was upbeat regarding the future outlook of the U.S. economy, investors are looking at the constant flow of weaker data and are starting to doubt that the Fed will be able to hike interest rates again this year. The reduced interest rate expectation is keeping demand for the dollar limited, albeit slightly stronger than demand for the pound.

Why do raised interest rates boost 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. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.
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