The pound continued to slide versus the dollar on Tuesday, marking its sixth straight day of decline. The U.S. was closed as it was Independence Day, although the U.S. dollar market remained open. During the course of Tuesday, the pound weakened 0.2% against the dollar, dropping from a high of $1.2949 to a day’s low of $1.2913, before closing the session at $1.2918.
|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 U.S. 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 U.S. dollar’s worth versus the British pound. If the sterling number gets larger, it’s good news for the dollar.
Today sees the release of the service sector PMI. This is the last of the PMI’s released this week and the most important given the dominance of the sector in the UK economy. Earlier in the week data showed that both manufacturing activity and construction activity growth had slowed more than analysts were expecting as political uncertainty weighed on sentiment.
Although manufacturing and construction activity only account for 10% and 6% respectively of the UK economy they are often seen as indicators for the service sector reading. A lower than forecast reading for service sector activity could bring the pound even lower as it would add to evidence that the UK economy is not yet strong enough to warrant an interest rate rise. When investors start to think that an interest rate hike is being pushed further into the distance, the currency will usually decline.
|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 keeping an eye on the development of geo-political tensions with North Korea after the nation reportedly successfully tested an intercontinental missile.
Looking towards more domestic events investors will also be focusing on the U.S. Federal Reserve Minutes, due to be released later this evening. The minutes from the meeting last Wednesday could impact on the markets. If the minutes show that the Fed appears to be confident that inflation will push higher or that the central bank is showing signs that it may look to raise interest rates, the dollar could rally.
Currently the market is putting the probability of another interest rate hike before the end of the year at 50%. When interest rate expectations are on the increase the currency will usually move higher, so a positive Fed tomorrow could strengthen the dollar pulling the GBP-USD exchange rate lower.
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.