The big event last week for the pound was the Bank of England’s cautious May meeting, and news that the central bank cut its growth forecast. However, the pound managed to stay afloat versus the U.S. dollar, thanks to underwhelming economic data from the States.
The pound to U.S. dollar exchange rate hit a high of $1.30 last week for the pound, before moving lower to finish the week at $1.28. Meanwhile, today sterling rallied to a high of $1.2940, before once more selling off.
The dollar as a “safe-haven” currency
The US dollar was out of favour as we kicked the week off, as news that China was planning an ambitious new Silk Road initiative to boost global trade. This improved the risk appetite of investors, who were quickly putting off “safe-haven” currencies such as the U.S. dollar. A safe-haven currency is one that investors look to buy during times of uncertainty, as they’re perceived less risky and often appreciates in value in such conditions. The reverse also stands true, with the dollar weakening today on perceived economic benefits, stemming from China’s proposed infrastructure project. However, given that any actual action regarding the new trade route is a long way off, the resultant selloff of the dollar was only going to be temporary, which led to the pound US dollar exchange rate falling towards the end of the day.
Economic data, why is it important for currency values?
Looking ahead, this week is a big week for economic data releases for the UK, with inflation data due on Tuesday, jobs data on Wednesday and retails sales expected on Thursday. Economic data can play a big part in moving a currency because investors want to put their money into countries where growth prospects are strong. To do this they need local currency, which increases the demand for that currency and pushes up its value. So, when there’s good economic news, such as strong growth in jobs, then the value of the pound increases. Given that the US economic calendar is relatively quiet in comparison to the UK calendar, the pound is more likely to drive the GBP to USD exchange rate this week.
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