GBP/USD: Politics Weigh On The Dollar And Support The Pound

10.11.17
4 minute read
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After falling in early trade on Thursday, the pound US dollar exchange rate then strengthened later in the session. The pound US dollar exchange rate finished the Thursday increasing upwards by 0.3% at US$1.3152 for the pound. The stronger exchange rate was more due to dollar weakness than pound strength.

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.

The pound was broadly weaker on the penultimate day of trading, as several unfavourable factors stacked up against the currency. With the UK cabinet still in chaos, weak economic data was also unsupportive of the pound. The European Commission downgraded the forecast for UK economic growth. The EC anticipated UK economic growth of 1.5% this year, down from 1.8%, then 1.3% in 2018 and an anaemic 1.1% of growth in 2019. The weak data weighed on the mood for the pound.

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

Boosting the pound later in the session was news that UK Prime Minister Theresa May could be prepared to offer the EU more money for the EU divorce bill. Negotiations between the EU and the UK remain in deadlock. The EU are insisting that more money needs to be offered only then will they consider talking about the transition deal that the UK so badly needs in order to assure a smooth Brexit. More money could be offered after the UK budget on 22 November, but Theresa May is expected to want assurances that the money will result in a breakthrough in negotiations leading to 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.

Dollar Under Pressure as Tax Bill Hits Complications

Sentiment for the dollar was knocked in the previous session after the US Senate and House of Representative are due to clash over President Trump’s tax reforms. The Senate wishes to keep 7 tax brackets, as opposed to the 4 put forward by the House. Furthermore, the Senate wants to delay the introduction of the corporate tax cut until 2019. The Senate’s tax plan could be released today or early next week and is expected to look quite different from the House’s plan. How different the Senate’s plan is to the House plan will dictate how the dollar trades. For example, if there is a large difference between the two plans, the dollar could fall more. Any signs of trouble for the pro-economy tax plan and the dollar could move lower.

Politics aside and the consumer confidence report today could create some volatility for the dollar. Confident US consumers are happy to spend their money, which is positive for the US economy and inflation. A positive reading today could give the dollar a much-needed boost.

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