GBP/USD: Pound Strong vs Dollar Amidst Political Tensions With Russia

27.03.18
4 minute read
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The pound charged strongly higher versus the US dollar on Monday. Pound strength combined with a weaker dollar on geopolitical concerns, pushed the exchange rate 0.7% higher to 1.4238.

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 continued to find support from crucial events in the previous week. Last week pound traders learned that there was an increased possibility of the Bank of England raising interest rates in May, which boosted the pound. Furthermore, market participants also learned that the UK and the EU had agreed on a Brexit transition deal, which should help ease UK business through the Brexit process without any hard, business damaging changes.

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.

This week is particularly quiet as far as high impacting economic data iis concerned. Investors will look ahead towards the end of the week for the UK GDP reading. Analysts are forecasting that economic growth will have fallen to 0.4% quarter on quarter, down from 0.5%. On annualised basis, analysts are forecasting a fall in GDP to just 1.4%, from 1.8%. This would make Britain’s economy one of the slowest growing major economies. Should economic growth prove to be weaker, the pound could give up some of the gains from the previous session.

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.

Dollar weakens as US expels Russian diplomats

The US announced on Monday that it would expel 60 Russian diplomats, joining 17 governments including very large NATO ally - France, Germany, Poland Canada in a coordinated move against Russia. The punishment comes as part of a retaliation against the Kremlin for a nerve agent attack on a former Russian spy in Britain, which has been blamed on Moscow. This will be the largest collective expulsion of Russian officers in history. The Kremlin is unlikely to take this lying down and has already promised to respond provoking fears of rising geopolitical tensions.

In the absence of any fresh headlines over rising geopolitical tension with Russia, investors will turn their attention towards US Consumer confidence data. Analysts are expecting consumer confidence to have increased yet again in March after surging in February to its highest level since 2000. Strong jobs growth, a booming economy and increased disposable income from the tax cuts have all helped Americans feel more confident in the future economically.

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