The pound experienced a choppy session versus the dollar on Thursday. The pound US dollar exchange rate dropped sharply in early trade, only to climb higher, before drifting lower for most of the later part of the session. The exchange rate hit a high of US$1.3988 before closing out at $1.3938.
|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 under pressure in early trading as concerns over escalating geopolitical tensions weighed on sentiment for sterling. Relations between UK and Russia are at the lowest level since the cold war, as UK Prime Minister Theresa May expelled 23 Russian diplomats in response to Russia’s apparent involvement in the use of chemical weapons in Britain. Moscow is expected to retaliate to sanctions imposed by Theresa May, which is unnerving market participants.
Brexit news was on hand to pick the pound up off session lows. Rumours have started to circulate that a Brexit transition deal could be imminent. Brexit Secretary David Davis will go to Brussels this weekend. Last year David Davis was a regular in Brussels for Brexit talks. This year he has avoided going. However, that fact that he is on his way to Brussels suggests he thinks a deal is imminent. A transition deal would help UK business adjust slowly to Brexit, preventing any cliff edge changes. This would be beneficial to the pound.
|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.|
The dollar was broadly in favour on Thursday following positive economic data and the appointment of Trump’s new Economic Advisor Kudlow. Kudlow is widely viewed as an advocate for free trade which given the current environment and fears of a trade war, is good news for the economy. Investors are hoping that Kudlow will be able to tone down President Trump's increasingly protectionist, damaging views. The fact that Trump is even willing to have Kudlow in the White House given his stance on interventionist policies is being interpreted as good news.
Today market participants will look towards the US economic calendar for further clues to direction, ahead of next week's Federal Reserve monetary policy meeting. With a string of US releases expected, the most influential on the dollar are expected to be industrial production and manufacturing, building permits and University of Michigan confidence. Strong data could boost the euro
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