The pound appreciated versus the US dollar on Thursday, as investors dealt with a barrage of economic data. The pound climbed just shy of 0.2% versus the dollar, but it struggled to trade in a sustained manner above US$1.32.
|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 retail sales data was far from strong, but it was better than what analysts had forecasted, which pleased pound buyers. Retail sales dropped by 0.3% in October, compared to October last year. This was the first decline in retail sales since March 2013, but it was better than the drop of 0.4% that analysts had predicted. Meanwhile, on a monthly basis, retail sales increased by 0.3%, beating the 0.1% figure that analysts had anticipated.
Retail sales data is showing an underlying trend of steady growth. This is impressive given the difficult conditions that the UK consumer is experiencing; namely, rising prices and lower wages once inflation is accounted for. This is because even if the wages of UK households grew, the rise in inflation meant lesser purchasing power of the money earned. The stronger than forecast retail sales data boosted demand for the pound.
|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.|
There are no influential UK economic indicators for investors to focus on today. In the absence of any major Brexit headlines, investors will instead look ahead to the UK Chancellor’s Autumn Statement on Wednesday next week.
The mood for the dollar picked up on Thursday afternoon despite some mixed economic data. On the downside, initial jobless claims, an index that measures layoffs by measuring the number of people applying for unemployment benefits , came in weaker than analysts had estimated. The claims unexpectedly increased to hit a six-week high. However, this increase appears to be due to a large backlog of applications following the hurricane battered Puerto Rico and the Virgin Islands. Given that the bigger picture remains healthy, with unemployment down at historic lows of 4.1% the dollar’s reaction to the increase was tame.
On the plus side, US industrial production numbers showed an encouraging jump of 0.9% against an expected increase of 0.5%. This is the biggest increase recorded in six months, as factories returned to normalcy after disruptions from the summer hurricanes. Both sets of data are consistent with a steadily growing economy and overall tightening labour market conditions. This will likely keep the US Federal Reserve happy and on course to raise interest rates at the final monetary policy meeting of the year, next month. As a result, the dollar firmed up against 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.|
With few high impacting data points on the US economic calendar today, investors will be watching carefully for any updates over Trump’s tax reform. Continued signs of delay could send the dollar 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.