Renewed concerns over the health of the UK economy sent the pound southwards on Thursday, whilst a weak euro boosted the US dollar. Consequently, the pound US dollar exchange rate plunged 0.7% to a low of US$1.3162, wiping out most of sterling’s gains from Wednesday’s session.
|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.
Sentiment towards the pound slid again in the previous session. Data from the Confederation of British Industry (CBI) showed that UK retail sales dropped sharply lower in October. The CBI survey showed that the largest percentage of retailers reported falling sales in October since 2009. This is just the latest in a string of evidence which indicates that rising prices and sluggish wages are squeezing the UK consumer. As a result, British households are spending less, and reprioritizing their spending away from non-essential items and towards essential items.
Retail sales data does have a tendency to be volatile, but this weakness has now been evident across a couple of months. This suggests that a significantly weaker trend is being established.
The weak data is concerning for retailers as Christmas quickly approaches. It’s also concerning investors who believe that the Bank of England (BoE) may hold back on an interest rate rise next week given the loss of momentum in the economy. As the markets’ perceived odds of an interest rate decreased, so did the value of the pound.
|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 there ‘s no influential UK economic data. Pound investors will look ahead to next week’s BoE monetary policy meeting and interest rate decision next Thursday.
The dollar was in demand on Thursday thanks in part to investors selling out of the euro. When European Central Bank President (ECB) Mario Draghi disappointed the market with his conservative message, the euro tanked versus most of its peers. Meanwhile, the dollar soared as these investors who sold out of the euro looked towards the dollar as a suitable alternative investment.
Investors will now look towards today’s US GDP data. Analysts are forecasting that the US economy will have grown by 2.6% on an annualised basis. This would represent a slight easing back from growth of 3.1% in the second quarter. However it’s still an encouraging number and, if reached, could boost the dollar further.
|Why does strong economic data boost a country’s currency?|
|Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.|
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.