Demand for the dollar was on the increase on Monday after the impact of Hurricane Irma was less catastrophic than investors had feared. As a result the pound US dollar exchange rate eased back off recent highs, slipping to US$1.3170 as it moved into Tuesday.
The pound is looking well supported as it moves into the new trading day. News that the EU Withdrawal Bill, or the Brexit Bill, has passed a crucial vote in parliament could keep demand for the pound resilient. This passing of this bill means that the legislation that ties the UK to Brussels would be scrapped. While at the same time these laws will be transferred to the domestic statute book in an attempt to minimise disruption and encourage a smooth Brexit.
|Why is a smooth Brexit good for the pound?|
|A smoother Brexit would be a scenario in which the economic consequences of leaving the European Union are minimised. This is favourable for the pound because the less the Brexit impact on the economy, the more likely that foreign investors will remain interested in the UK. Foreign investors need sterling to invest in the country and so the more GBP is purchased, the higher the demand and, thus, an increase in the currency’s value.|
Investors will now look towards inflation data due to be released this morning at 09:30 BST. City analysts are expecting the cost of living to have increased to 2.8% year on year in August. Inflation has slipped lower for the past two consecutive months, dropping to 2.6% in July. The recent fall in inflation has meant that the Bank of England was under less pressure to increase interest rates. When the odds of an interest rate decline so does the value of a currency. Should inflation come in higher than the 2.8% forecast, then the pound could rally, as the odds of a rate hike increase.
|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.|
Meanwhile demand for the dollar increased on Monday after investors breathed a sigh of relief. The impact of Hurricane Irma, although severe, was not catastrophic as the markets had first feared. Residents of Miami dodged the most dangerous part of the storm, which has left millions without power. Disaster risk experts will now begin counting the possible cost of the deadly storm, however the initial assessment from the market is that it could have been worse, so the impact on the economy could be to the lower end of estimates. As a result, interest in the dollar is picking up again as investors believe the hit to the economy will be slightly less than initially anticipated.
With no US economic data of interest, dollar traders will continue following the headlines over the potential cost of Hurricane Irma.
On a separate note, tougher UN sanctions towards North Korea have been agreed, so dollar traders will also be watching for a reaction from Pyongyang, which could pull the dollar lower.
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