The pound us dollar exchange rate reached monthly highs as investors digested Brexit headlines and weaker forecast US data. The pound rallied to a high of US$1.3116 on Thursday, before retreating slightly at the close. This is the strongest level that the pound has traded versus the dollar since August 4th.
UK MP’s are back in their seats in Westminster after the summer recess. As the discussions over the Brexit Repeal Bill began, there was renewed hope that the government could be looking for a transition period, allowing for a smooth Brexit. Brexit Minister Davis David said that there were good prospects of such a deal being achieved. Pound investors found this reassuring and brought into sterling.
|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 Brexit Repeal Bill debate continues today and so any headlines coming from Westminster could impact on the euro. This morning will also see the release of some important UK data which investors will also be watching carefully. Firstly, should the Bank of England’s inflation report show that the cost of living is increasing, then the pound could take another step higher versus the dollar. Similarly, if today’s data shows signs of the manufacturing and industrial sectors expanding then the pound could also receive a boost.
|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.|
The dollar was out of favour again on Thursday. The dollar has been struggling across the board all week as North Korea, Hurricane Harvey and now Hurricane Irma weigh on sentiment. Add to the mix disappointing data and it’s easy to see why investors are looking elsewhere.
The strongest American storm on record is heading for Florida in the next day or so, with 37 million people expected to be affected by the path of the storm. This new storm comes just days after Hurricane Harvey hit out Houston Texas, where the economic impact has been put at $180 billion. The hurricane season this year has been one of the strongest in a generation and the cost to the US economy will be substantial. As a result, the US dollar is remaining under pressure.
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