GBP/USD: Dollar Trading Higher vs. Pound Ahead Of NFP

09.03.18
4 minute read
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Brexit concerns and waning trade war fears pulled the pound US dollar exchange rate lower on Thursday. The exchange rate fell from an early high of US$1.3910, to a session low of $1.3782. This is the weakest that the pound has traded at versus the dollar in three sessions.

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 concerns have been a central theme for the pound across this week. Earlier in the week, European Council President Donald Tusk, as good as completely rejected UK Prime Ministers Theresa May’s vision for a post Brexit UK-EU relationship. Instead Tusk warned the UK that it needs to lower its expectations of the trade deal that it could achieve.

On Thursday Donald Tusk continued make the headlines, this time saying that Brexit talks will be suspended until there is an agreement over the Northern Ireland border issue. How to handle the border in Northern Ireland has been a point of contention since the beginning of talks and so far, there still isn’t a solution which all sides agree on. Should the two sides fail to find common ground over Northern Ireland, the pound could continue to fall as the chances of a hard Brexit increase.

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.

Today investors will turn their attention back towards the economic calendar, with a raft of UK releases due. These include manufacturing data and trade balance numbers.

Trade War Fears Ease; NFP In Focus

Dollar pushed higher in the previous session as trade war fears eased and as investors looked ahead towards the US non-farm payroll (NFP) numbers. Trump’s steel and aluminium tariffs are due to start in 15 days. However, Trump announced on Thursday that he would make exceptions for “real friends”, Canada and Mexico. The announcement has gone some way to easing fears over retaliations and a trade war.

Looking ahead to today’s US Labour Department report, analysts are forecasting that 200k new jobs were created in February. Analysts are also expecting average earnings growth to increase by 0.2%. Given that the number of private sector jobs created in February was greater than forecast, February could also be a bumper month for the non-farm payroll report. A strong reading tomorrow could end the dollar higher.

How does the non-farm payroll (NFP) affect the US dollar?
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 up the currency’s worth.
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