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GBP/USD: Pound Recovers vs Dollar As UK PM Holds On
Political disarray in the UK sent the pound lower versus the US dollar on Monday. The pound dropped to a low of US$1.3190, its lowest level since last Wednesday, before regaining some ground towards the close.
| 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 initially moved higher versus the dollar following the announcement of UK Prime Minister Theresa May’s softer approach to Brexit. Theresa May forced upon her party a Brexit whereby the UK was more aligned to the EU in trade. However, Theresa May is struggling to contain the fallout, as hard-line Brexit minister oppose to the change of stance. The pound remained resilient when UK Brexit Secretary David Davis handed in his resignation. However, the pound fell hard when Foreign Secretary Boris Johnson resigned. This is because Boris Johnson is a potential alternative leader and is therefore a threat to Theresa May. The increased political risk sent the pound lower.
| How does political risk have impact on a currency? |
|---|
| Political risk drags on the confidence of consumers and businesses alike, which means both corporations and regular households are then less inclined to spend money. The drop in spending, in turn, slows the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. Signs that a country is politically or economically less stable will result in foreign investors pulling their money out of the country. This means selling out of the local currency, which then increases its supply and, in turn, devalues the money. |
So far Theresa May is defiantly standing her ground. There were concerns that she could quit; however, this no longer looks likely. Theresa May is unlikely to now face a vote of no confidence for the time being. However, she is expected to have a difficult road ahead after her authority has been damaged.
Today the UK economic calendar provides more of a distraction to investors. Whilst political risk will remain a central focus, market participants could also glance towards industrial and manufacturing output numbers. Analysts are expecting an improvement in both figures from last month, which could offer some support to the pound.
| How does political stability boost a currency? |
|---|
| Political stability boosts both consumer and business confidence, which means corporations and regular households alike are more likely to spend money. The increased spending, in turn, then boosts the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. For foreign investors to put their money into an economy, they need local currency. As they acquire the money needed, the demand for that particular currency increases, which then boosts its value. |
Pause In Trade War Talk Supports Dollar
After trade war headlines have driven trading in the dollar for so many session, a pause in rhetoric was well received. Instead dollar investors were able to focus on other stories. Investors looked ahead to the US earnings season which starts at the end of the week and is expected to be a strong one, despite recent trade war concerns. This optimism has also improved the mood towards the dollar, which moved higher in the previous session.
Today, market participants will continue to listen for new trade war headlines, such as growing animosity between the US and China and the US and Europe. There is no high impacting US data due for release.
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