The pound struggled against the strength of the US dollar on Tuesday. As a result, sterling fell to a low of US$1.3110, before climbing higher towards the end of the session. The pound finished the day trading at just 0.1% lower versus the dollar.
|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.
The pound was under pressure after the British Retail Consortium (BRC) released figures showing a sharp decline in UK retail sales. BRC data pointed to total retail sales increasing by just 0.2% in October; like for like (LFL) growth in sales dropped 1%, a massive turnaround from September’s increase of 1.9%. LFL growth figure is a more reliable indicator of current sales trade because it measures growth in sales while adjusting the data for new and divested businesses, or any other activity that artificially enlarge a company’s sales activity.
Delving deeper into the numbers released, sale of non-food items dropped the most in 5 years, highlighting the extent by which the UK consumer is reining in their spending. It appears that rising prices and falling wages in real terms are causing the UK consumer to hold back their spending on non-essential items. As is usual, when economic data disappoints, the currency declined.
|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 is once again short on economic data that could drive the pound’s direction. Investors may therefore switch their attention back towards Brexit, ahead of the start of another round of Brexit talks tomorrow and following the release of post Brexit legislation. The UK government announced a new bill which entered parliament and aims to provide the UK with a framework for independent trade for once it leaves the EU. This should help provide more certainty and clarity for businesses and trading partners, which in itself should offer support to the pound.
|Why is a smooth Brexit good for the pound?|
|A smoother Brexit would be a scenario in which the economic consequences of leaving the European Union are minimised. This is favourable for the pound because the less the Brexit impact on the economy, the more likely that foreign investors will remain interested in the UK. Foreign investors need sterling to invest in the country and so the more GBP is purchased, the higher the demand and, thus, an increase in the currency’s value.|
There are several factors making the US dollar attractive at the moment. These are making any recovery attempt by the pound against the dollar troublesome.
Of the the factors supporting the dollar, the most relevant right now is probably investor expectations of an interest rate hike in December. At the November meeting the Fed indicated that the door was open for a rate rise in December. As a result, the market is currently placing the odds of it happening at 95%. This has provided strength to the US dollar.
Investors will now look nervously towards President Trump and his tour of Asia. Today he is due to meet with South Korean President Moon. While comments regarding North Korea have so far been constructive, this could change at any moment given Trump’s erratic past record. Any signs of trouble brewing again between North Korea and President Trump, could weigh on sentiment for the dollar.
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.