GBP/USD Dollar Weakens as World Economy More Optimistic

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.

This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Inc., Currency Live or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. Consult our risk warning page for more details.

This article was initially published on from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.