Pound Initially Drops, Then Gains Against Dollar Amidst Theresa May's Cabinet Shuffle

09.01.18
4 minute read
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The pound dropped yesterday afternoon, against the dollar, to a low of 1.3528 before then regaining its losses and steadily moving towards 1.3569 and remaining more or less stable thereafter. Compared to the beginning of this week and last week, the pound is still relatively weak against a slightly stronger dollar.

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.

This morning saw the release of manufacturing production data from the UK, this number measures the changes in value of output produced by manufacturing industry. Since manufacturing accounts for 80% of industrial production in the UK, this data is important for pound investors. The reading came in just as the analysts had expected, which shows a marginal but significant growth in the sector. This shows that the pound is still going strong as the UK economy continues to stay strong.

Why does strong economic data boost a country’s currency?
Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.

The UK prepares for a No-Deal Brexit; US Consumer Credit figures soar

Meanwhile, however, a no-deal Brexit continues to be a possibility as no new developments have occured in the trade deal negotiations between UK and the EU. A no-deal Brexit simply means there would not be any trade deal that will deal with economic relations between UK and EU once UK exits the bloc. The deadline for reaching a consensus on the trade deal is fast approaching and investors will soon begin to worry if the talks begin to get pushed further into distance. The initial drop in the pound came from UK Prime Minister Theresa May's reshuffle of her cabinet. Reports in the media say that the PM might appoint “a cabinet minister for no-deal”, suggesting that UK is preparing for a hard Brexit, making the pound jittery.

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.

The US saw the release of its latest consumer credit figures for the last month. The analysts had expected this figure to be at $18.000 billion, but the actual figure came in higher than expected, at $27.951 billion. This means that the US consumer is still spending confidently, which indicates that the health of US economy is robust. Last week’s job growth figures, and a booming stock market has continued to add strength to the value of the dollar and investors continue to put faith in the greenback.

A lot of important economic data is expected to be released out of the US in the next couple of days. Among them, more data on US employment growth and US manufacturing industry growth is expected to be most influential on the value of dollar. More attention, however, will be on Theresa May’s cabinet and any news about developments concerning Brexit trade talks will significantly influence the value of pound.

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