The pound sunk to a two-week low versus the dollar on Tuesday. Increased demand for the dollar ahead of the US Fed interest rate decision and inflation woes, pulled the pound US dollar exchange rate to a low of $1.3304 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 pound initially spiked higher on the news that the cost of living in the UK had increased by more than what analysts had predicted in November. Inflation increased 3.1%, ahead of the 3% year on year that analysts had been forecasting. On a month on month basis, inflation ticked up to 0.3%, ahead of last month’s 0.1% and higher than analysts forecasts of 0.2%.
Usually higher inflation would cause investors to adjust the odds of an interest rate rise higher. However, given that the Bank of England hiked rates just last month, no change in monetary policy is expected to come from these results.
Today investors will look towards UK wage data in order to assess how much pressure is being placed on the UK consumer. Analysts are anticipating that average wages will have increased 2.5% in the three months to October. This would be a 0.3% uplift from September, which would go some way to closing the gap between wages and the rising cost of living. A strong reading could be expected to boost the pound.
|How does strong jobs data boost the currency?|
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the good and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.|
The dollar moved higher on Tuesday as investors wait patiently for the US Federal Reserve monetary policy decision later today. The Fed are expected to hike rates by 25 basis points despite some ongoing concerns over low inflation.
In the previous session, the producer price index (PPI) jumped to over 3%, its highest level in 6 years. PPI is a measure of inflation at factory gate level, so points to a firmer inflation level in the future. The strong reading could help to ease some concerns at the Fed as officials enter into the two-day FOMC meeting. Should this be the case, the Fed could turn more hawkish.
The market is almost certain that the Fed will hike rates. Therefore, the impact on the price of the dollar could be limited. Instead investors will focus on the statement and press conference in order to project the path of interest rate rises in 2018. A more aggressive Fed could result in the dollar climbing higher.
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.