The pound soared close to 1.5% versus the dollar in the previous week. Hopes of a post-Brexit transition period boosted the pound while concerns over the medium-term outlook of the dollar kept the buck depressed. The pound US dollar exchange rate is trading at US$1.3265 moving into the new week.
|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 very much remains a political currency as Brexit news drives trading. Last week, the pound briefly pulled lower, as hopes of a post-Brexit transitional period diminished among traders. However, Friday saw the prospect of a transition period return to the table, which boosted the pound as it moved into the weekend.
A post-Brexit transition deal would see the UK stay within the single market and the customs union for a further 2 years after it exits the European Union. This would help achieve a smooth Brexit, as the continuation of the status quo would mean that there would be no cliff edge or hard Brexit for UK business to fall off.
|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.|
Today, UK Prime Minister Theresa May will travel to Brussels for emergency meetings ahead of the EU leaders summit on Thursday. May is doing whatever she can to try to ease the current stalemate in Brexit talks. She’s already spoken with German Chancellor Angela Merkel and is due to meet with EU Chief negotiator Michel Barnier in addition to other EU leaders. At the EU leaders summit, the 27 EU states will decide if the UK can progress to the second round of Brexit talks, which can include talks on a transition period and future trade deals between the EU and the UK. Any sign that progress isn’t being made could pull the pound lower versus the dollar.
The dollar was showing a rare sign of strength as markets opened on Sunday evening. Weak inflation data and concerns over the medium-term outlook for the dollar have been weighing on trader sentiment for the buck. The US Federal Reserve strongly hinted that an interest rate hike will happen in December, despite the low inflation that the US is experiencing. However, investors are concerned that persistently low inflation will mean that the Fed is unable to continue hiking rates as we move into the next year. As the odds for interest rate hikes next year lowered, the value of the dollar declined.
|Why do raised interest rates boost a currency’s value?|
|Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.|
Today is relatively quiet as far as high-impacting US economic data is concerned. However, there will be plenty of Federal Reserve Officials making speeches through the week, including 2 appearances by Fed Chair Janet Yellen, which could create volatility in the dollar rate.
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