GBP/USD: Pound Remains Sub $1.30 As PM May Looks Increasingly Unstable

TransferWise content team
24.04.19
3 minute read

The pound closed lower versus the dollar for the seventh straight session on Tuesday. The pound US dollar exchange rate dropped to a low of US$1.2929 as Brexit concerns and optimism surrounding the US economy drove movement in the pair.

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 USDHere, £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 GBPIn 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.

As Ministers returned to Parliament after the Easter recess, Brexit was firmly back in focus. Prime Minister Theresa May announced that she could bring the Brexit Withdrawal Agreement Bill back to the House of Commons for a fourth vote. There is little evidence to suggest that it will pass this time after failing three times previously. However, Theresa May is desperate to find a way to avoid the toxic European elections.

Cross party Brexit talks continue. Labour, the opposition party, has said that it will not support the Prime Ministers’ Withdrawal deal unless the government shows significant movement across some of its red lines. There is little confidence in Downing Street that the talks will yield a breakthrough. Some reports suggest that the talks could collapse as soon as next week.

Conservatives ministers are becoming increasingly frustrated with Theresa May’s leadership and her ability to deliver on Brexit. Pound traders are nervous as well. Should Theresa May be ousted, there is a good chance that she could be replaced with a hardline Brexiteer. This would mean that a no deal Brexit could once again become a plausible option.

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.

Although Brexit will remain in focus today. Investors could also glance towards UK public sector net borrowing data.

Dollar Rules

The dollar was the overall winner on Tuesday. It traded higher versus its peers thanks to strong US economic data. The dollar is once again showing signs of life as recent economic statistics point to a stronger economy in the first quarter than originally depicted, amid the January government closure.

At the end of last week, US retail sales impressed investors. Yesterday, new homes sales data impressed. New homes sales increased 4.5% year on year, well ahead of the -2.7% decline that analysts had forecast. This was a 16 month high and the third straight increase in home sales, reflecting the lower cost of borrowing, rising wages and a confident consumer. The strong data boosted the dollar.

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.

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