The US dollar continued to suffer a broad based sell off on Wednesday as data pointed once more to the weakening of the economy. Meanwhile the pound continued rising against the US dollar despite Brexit concerns lingering. The pound US dollar exchange rate hit a high of US$1.3083, before easing back towards the close.
The pound had another strong session on Wednesday, building on gains from earlier in the week. However, investors will be starting to doubt whether the pounds performance will be able to continue for much longer. Brexit is the reasoning behind these thoughts.
Yesterday papers were leaked from the Home Office pointed to a hard stance to immigration to begin the day after Brexit in March 2019. This is to be implemented through strict border controls and fines for companies employing EU over UK applicants. Such an approach is in line with the hard Brexit that the government had been distancing itself from in recent weeks. A hard Brexit would create a very challenging environment for business and could pull the pound significantly lower.
|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 MP’s will begin the second reading of the Repeal Bill, ensuring that Brexit remains in the forefront of investors’ minds. This may prevent the pound from gaining more ground.
The dollar remains out of favour as it contends with problems on various fronts. Firstly the geopolitical tension with North Korea show little sign of abating. Given the US involvement investors are preferring not to use the buck as a safe haven currency. Secondly whilst the US is counting the economic cost from Hurricane Harvey, another Hurricane is set to hit in the coming days. Weather experts are saying it will be another powerful hit with potentially huge economic cost. This comes at a time when the US economy is already showing signs of weakening. The soft US jobs report on Friday was followed by weak factory orders and then yesterday’s manufacturing data was also weaker than analysts had been forecasting.
|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.|
Earlier in the week Federal Reserve Official Lael Brainard warned against rising interest rates too soon. Today Fed Official Dudley will speak. Investors will be keen to see if he holds the same position as Brainard. If he is also cautious regarding further hikes then the dollar could sell off further.
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