After a string of bad data from the UK throughout the previous week, the pound fell back from its recent 5 week high versus the dollar. Sterling dropped almost 1% against the buck last week to its current level of $1.2890.
|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.
Despite the pound hitting a 5-week high at the end of June, a barrage of weak data has raised concerns over the outlook of the UK economy. Business confidence and business activity reports in the manufacturing, construction and service sector all underwhelmed in June. Political uncertainty from the recent general elections plus the starting of Brexit negotiations weighed on business sentiment, pulling the business survey readings lower than analysts had forecast.
As if that wasn’t bad enough, Friday saw the release of other key pieces of data concerning manufacturing, industrial productivity, and industrial activity. Once more the data fell short of what analysts had anticipated, with almost all figures printing negative instead of positive. For example, construction activity was forecast to increase annually by 1% in May, instead it decreased 0.3%. Industrial production was forecast to increase by 0.2%, instead it declined by 0.2%. The weak data has increased concerns over the state of the economy, which has sent the pound lower.
|Why does poor economic data drag on a country’s currency?|
|Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.|
The economic calendar for the pound is busy once again this week. Investors will analyse retail sales figures today, the UK inflation report on Tuesday and wages data on Wednesday. Following these releases, investors will have a slightly clearer picture as to the state of the UK economy and gain a deeper insight into the extent of the squeeze the consumer is feeling.
Meanwhile the dollar was enjoying a rare burst of positive data, which helped boost the buck amid concerns of a stalling economy. Manufacturing and non-manufacturing data beat expectations early in the week, and then the all-important jobs report came in with another positive result. Job creation in the US rose much faster than had been forecast, which has prompted hopes that the Federal Reserve will push through another rate hike this year, even though wages are not yet rising by any significant amount.
|How does the non-farm payroll (NFP) affect the U.S. dollar?|
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the good and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.|
Federal Reserve Chair, Janet Yellen, should let the market know her thoughts on the report and the prospects of another hike at the semi-annual congressional testimony this week. Should the Fed show signs of still being comfortable with the fact that wages are a lagging indicator, then the dollar could take another step higher as expectations of a rate hike before the end of 2017 increase.
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.