Slow trading due to Thanksgiving holiday in US prevented the pound US dollar exchange rate from falling too heavily on Thursday. Mixed data from the UK sent sterling lower, pushing the pound US dollar rate towards US$1.33 for the pound.
|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 mood for the pound soured in the previous session as investors focused on the negative aspects of economic data released. Firstly, UK economic growth for the third quarter came in at 0.4%, higher than the 0.3% that analysts had predicted. However, investors were more concerned about the fall in business investment that the UK economy experienced in the same quarter. Business investment helps drive the economy forward, but Brexit uncertainty is making Britain unattractive to invest in, due to political uncertainty. This means that although the GDP was stronger than the forecast, economic growth could slow going forwards.
|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 retail sales data from Confederation of British Industry (CBI) could have been another source of optimism for pound traders. Retail sales rebounded strongly in November, from a sharp decline in October. Yet, investors chose to read between the lines and their concern that retailers were laying off staff dominated sentiment pulled the pound lower.
Today’s there is no high impacting UK economic data. This could leave investors dwelling on the cuts made to the economic growth forecasts earlier in the week and on the mixed signals from the economic data already released.
Thursday was the US Thanksgiving holiday. While the dollar continued to trade, many traders were away from their desks, so action was very limited.
Sentiment towards the dollar remained weak as investors continue to fret over the US Fed’s concern for inflation. With increasing frequency, the Fed is airing concerns that the level of inflation could remain below the central bank’s 2% target rate for longer than they initially expected. Fed Chair Janet Yellen echoed these thoughts in a speech earlier in the week. While investors are still confident of a rate hike in December, they are lowering their expectations of rate hikes next year. As odds for interest rate hikes lowered, so did the value of the dollar.
|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.|
While officially the US financial markets are open for half day today, many traders often extend the Thanksgiving holiday until Monday. Even though the US dollar market remained open throughout, because traders were away from their desks volume and volatility in the currency was low.
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.