The pound gained against the Australian dollar on Thursday after two events: data revealed that UK industrial trends improved more than expected and additional comments came out from the Bank of England (BoE) that gave hope of a rate increase. As a result, the pound rallied to A$1.6820, a level not seen since the beginning of the 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 = 1.72119 AUD
Here, £1 is equivalent to approximately A$1.72. This specifically measures the pound’s worth against the Australian dollar. If the Aussie dollar amount increases in this pairing, it’s positive for the pound.
Or, if you were looking at it the other way around: 1 AUD = 0.57677 GBP
In this example, A$1 is equivalent to approximately £0.58. This measures the Australian dollar’s worth versus the British pound. If the sterling number gets larger, it’s good news for the Aussie dollar.
Britain’s manufacturers are experiencing the strongest demand for their products since 1988, as the Brexit-weakened pound has reawakened demand for British-manufactured products. Both internal and export orders are at the highest levels for decades. These figures suggest that Britain’s roaring manufacturing sector could provide protection for the UK economy by cushioning it from slowing consumer spending.
When macro-economic data comes in stronger that at what analysts anticipated, the currency will usually appreciate – which explains sterling’s rally after this data release.
Adding to the good mood for the pound, another BoE policy maker waded into the discussion over whether or not to hike interest rates. Kristen Forbes has been a vocal supporter of rate rises for some time now. In her speech tonight, she warned over keeping interest rates at emergency levels for too long, urging the BoE policymakers to hike. Despite this being Kristin Forbes’ last month at the BoE, the pound rallied on her remarks as they boosted hopes for interest rates being increased.
|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.
Meanwhile, the Australian dollar has lacked direction and market-moving data. There’s still a long wait until the next piece of high impact data for the Australian dollar, which is next week. This comes in the form of the ANZ weekly confidence index on Monday.
In times when data input is low, the price of iron ore can also impact on the movement of the Australian dollar, which is also known as a commodity currency. The price of iron ore slid today for the first time in 6 sessions. The lower price of iron ore is weighing on the value of the Australian dollar.
|Why does the price of iron ore impact the Australian dollar?
|The reason behind the impact is because commodities, particularly iron ore, make up the bulk of Australian exports. Ultimately, Australian iron ore needs to be purchased using Australian dollars. So if the demand or expected demand for iron ore increases, then demand for the Australian dollar also increases. As the demand for the Australian dollar goes up, so does its value.
This article was initially published on TransferWise.com 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.