Pounds Jumps Against Dollar on Hopes of a UK Conservative-DUP Agreement

26.06.17
4 minute read
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The pound pushed higher versus the dollar as the new week kicked off on hopes that the Conservatives could soon secure a majority in the UK Parliament.

The pound jumped early on, trading at $1.2740 against the dollar. This is its highest level for the sterling in a week as political uncertainty has weighed on investor sentiment.

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.

As the Conservatives failed to win the number of seats required for a working majority in Parliament in the UK general election in early June, they need an agreement with another party in order to secure a majority. As the days have ticked past, fears had been increasing that the Conservatives weren’t going to be able to reach a deal with Northern Ireland’s Democratic Unionist Party (DUP), making the political future of the UK look increasingly unstable and uncertain. Reports late on Sunday suggested that progress has been made and, as a result, the pound edged higher.

How does political stability boost a currency?
Political stability boosts both consumer and business confidence, which means corporations and regular households alike are more likely to spend money. The increased spending, in turn, then boosts the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. For foreign investors to put their money into an economy, they need local currency. As they acquire the money needed, the demand for that particular currency increases, which then boosts its value.

The vote on the Queen’s speech is on Wednesday and Thursday so, ideally, an agreement between the two parties must be done by then to guarantee that Prime Minister Theresa May and her Conservatives stay in power. Any confirmation that an agreement is in place could result in a relief rally for sterling as the political uncertainty that’s been hanging over the UK since the general election starts to clear.

Demand for the dollar wanes, eyes turn to durable goods

Demand for the dollar eased towards the end of last week as investors started to doubt whether the U.S. Federal Reserve would be able to achieve another interest rate hike before the end of the year. Whilst Federal Reserve speakers at the beginning of last week had been more upbeat about the need for further rate hikes, speakers at the end of the week had been less convinced. As rate hike expectations decreased, so did the value of the dollar.

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.

Today sees the release of influential data for the dollar. Investors will be watching durable goods orders for an insight into the health of the U.S. economy. Durable goods are items that aren’t purchased frequently - like cars or appliances - and the buying of these goods usually involves large sums of money. Durable goods orders are the cost of orders received by manufacturers for these goods. A higher than forecasted figure would point to a consumer willing to spend, which would be a good sign for the economy and would be expected to boost the currency.

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