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The pound–US dollar exchange rate continued to climb higher on Wednesday. Anticipation of a more cautious Fed and Brexit optimism helped lift the pair to a high of US$1.3110. This is the highest intraday level that the pair has traded at in three weeks. However, the pound was unable to hold, and the rate closed lower at US$1.3062.
|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.
The pound moved higher in the previous session as investors cheered possible progress in Brexit talks. The Spanish foreign minister Joseph Borrell commented that the Brexit deal was being hammered out in Brussels at the moment. This goes against what EU Chief negotiator and EU Commission President Jean-Claude Juncker have been saying, that the EU is not willing to renegotiate. The sudden change in verse boosted hopes that there could still be some flexibility in Brussels, which boosted the pound.
However, Theresa May’s other major problem is getting anything through Parliament. Three pro-EU Conservative ministers defected to the newly created Independent Group party. The move by the Europhiles is an embarrassing setback for Theresa May and her Brexit plan. Any more defectors could pull the pound lower as it increases the chances of the Brexit deal not being voted through.
|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.
The dollar strengthened in later trade on Wednesday despite the Fed minutes from the January meeting showing that the Fed remained cautious. The bar to restarting rate hikes looks high with many members expressing the need for patience. With various negative forces still impacting on the US economy such as trade tensions and global growth concerns, a patient approach to monetary policy is appropriate. However, the Fed left itself some room to raise rates, by saying that if the negative influences eased then a reassessment of the patient approach would be needed. This has lifted hopes slightly that a hike could still happen, which boosted the dollar.
|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 investors will be faced with a barrage of US data. The most notable will be US durable goods. This will give investors a good indication over the health of the US economy. Market participants will also look closely at manufacturing PMI. Strong data could help lift the dollar.
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