GBP/USD: Pound vs. Dollar Boosted North Korea's Denuclearisation News

TransferWise content team
07.03.18
4 minute read

The pound US dollar exchange rate moved higher on Tuesday. However, this was more to do with dollar weakness than any particular strength in the pound. The pound hit a high of US$1.3929, this is the strongest that the pound has traded at versus the dollar in a week.

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.

Brexit headlines were once again in focus in the previous session, as negotiations between the EU and the UK continue. This stage of Brexit negotiations is focusing on the post Brexit transition deal and the post Brexit EU-UK relationship. Discussions surrounding trade deals fall into this category.

On Friday, UK Prime Minister Theresa May, gave a speech laying out her vision for the post Brexit relationship and trade deal. However, Stefaan de Rynk, the main adviser to EU Chief negotiator, dealt a blow to Britain’s chances of securing a deep free-trade deal with the EU. He did so by stressing that the rules of the single market required much more than Theresa May’s chief proposal, which was mutual recognition of standards.

The comments by Stefaan de Rynk are the fullest remarks from the European Commission regarding Theresa May’s speech. The comments also suggest that Theresa May’s proposal has already been dismissed. This means that the objective of an exceptional post Brexit trade deal is starting to look increasingly less likely, which could put the UK in danger of a hard Brexit.

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.

There is no high impacting UK economic data due to be released today. Investors are expected to continue watching Brexit developments very closely.

Dollar drops on improved geopolitical atmosphere

The dollar traded broadly lower in the previous session amid possible thawing in North Korea US relations.

North Korean leader Kim Jong Un has expressed a willingness to hold talks with South Korea and to negotiate with US on abandoning his country’s nuclear weapons programme. North Korea made clear that it would have no reason to keep nuclear weapons if the country’s security was guaranteed.

As the geopolitical atmosphere improved, market participants looked to sell out of the “safe haven” dollar and buy into riskier currencies. As a result, the dollar remained under pressure.

Today, the dollar could experience increased volatility, given the busy US economic calendar. Market participants will be paying particular attention to the private ADP payroll numbers, which can often serve as a good precursor to US non-farm payrolls on Friday.

How does strong jobs data boost the currency?
It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the good and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.
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