Pound Pushes Higher Against the Dollar Due to Brexit Hopes

TransferWise content team
4 minute read

The pound US dollar exchange rate finished in positive territory on Wednesday, breaking through US$1.32 for sterling. There was plenty of volatility after the pound shot higher following the release of the UK labour market data, before sinking to a low of US$1.3140. It then steadily climbed higher for the rest of the session.

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.

UK wages grew at 2.2% in the three months to August, as analysts had forecasted and slightly above last month’s 2.1% reading. This number wasn’t sufficiently strong to give investors’ confidence that the Bank of England (BoE) will raise interest rates in November. Strong wage growth usually indicates that inflation will rise higher. As the odds for an interest rate hike didn’t increase following the data, neither did the pound.

Brexit will be the main focus for today as the EU leaders meet for an EU leaders summit. Brexit headlines late Wednesday boosted the pound. Firstly, UK Prime Minister Theresa May has said that a Brexit Citizens’ Rights deal is close. This deal would be a simple process that allows EU nationals in Britain to gain “settled status”. This is important because it is one of the key points that the EU wanted to see progress on before talks could move to stage 2. Only when talks proceed to stage 2, can a transition deal or trade deals be discussed. Progression to this stage in the talks would mean that a smooth Brexit is more likely, which is 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.

Furthermore, reports of a leaked German document revealing that the German Foreign Ministry is keen to secure a comprehensive trade deal with the UK also boosted the pound. Germany sells far more to the UK than the UK does to them, which could go some way in explaining why Germany could be anxious for a trade deal. The 4-page document is being well received by pound traders as Theresa May flies to Brussels for EU leaders summit.

Trump Tax Cut Vote in Senate

The US dollar was generally stronger in the previous session, although it failed to keep up with the strength of the pound heading towards Thursday. The dollar was supported as the outlook for tax-overhaul plans in the US improved. Today, a vote will take place in the Senate on pushing the tax cut plans forward. The odds of the vote being passed improved on Wednesday after more senators publicly backed the measure, which helped the dollar.

How would Trump’s policies boost the US dollar?
A sizeable corporation tax cut would see a flood of money repatriated to the USA which would then create a high demand for the currency and, in turn, increase its value versus other currencies. Infrastructure spending in a country already close to full employment would also push wages higher, leading to more spending and thus boosting inflation. Higher inflation leads to higher interest rates and a higher demand for the currency.
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