The pound plunged over 100 points versus the dollar on Monday. Weak data on the UK economy contrasted sharply with strong economic data from the US, boosting the dollar’s appeal. Heading towards the close, the pound US dollar exchange rate hit a low of US $1.3257 for sterling. The pair had last hit this level during mid-September.
|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 US 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 US dollar’s worth versus the British pound. If the sterling number gets larger, it’s good news for the dollar.
UK manufacturing activity dropped in September as the weaker pound failed to boost the sector. Economists had assumed that a weaker pound would boost exports, as UK products would be more competitively priced for foreign buyers. However, the reality is that the benefit of the weaker pound has been offset by rising production costs. The cost of imported materials used in the production process has also risen due to a weaker pound, annulling any benefit from increased foreign orders. The overall impact of this has been a decline in manufacturing activity from August to September. This also points towards a general slowdown in momentum for the UK economy, which was evident in Friday’s soft second quarter GDP reading. Therefore, following Monday’s release of UK manufacturing data, the pound fell versus the dollar.
|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.
Today, investors will look towards data from the UK’s construction sector activity. The construction sector has been heavily hit by Brexit fears. August’s reading showed that construction activity dropped to a one year low. September’s reading is expected to equal August’s at 51.1, where a figure above 50 indicates growth in this sector. Should the reading be lower than this figure, the pound could tumble further versus the dollar.
While the UK manufacturing data was disappointing, the US manufacturing data impressed investors on many levels. Manufacturing activity in the US grew at its fastest pace in 13 years and, given that manufacturing accounts for 12% of US economic output, this is good news. There were fears among traders that the devastation caused by recent hurricanes Harvey and Irma would seriously impact the US third quarter growth. However, this data points to the storms having only a mild impact on growth.
The other key point from the data was the strong employment numbers in the manufacturing industry. Therefore, strong data helped push the dollar upwards versus the pound
Today is a quieter day as far as the US economic calendar is concerned. Investors will instead look towards Wednesday for service sector data and a speech by the Chair of U.S. Federal Reserve Janet Yellen.
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.