The pound US dollar closed as more or less the same level that it opened on Wednesday, as it remains steady close to its weekly high. Investors digested UK retail sales data and news of the US tax reform being approved by the Senate. The pound US dollar exchange rate closed the session at US$1.34 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 was under pressure generally after the Confederation of British Industry data pointed to a slowing in spending by the UK consumer. Retail sales data from December slipped slightly from November, which was a bumper month. However, to see retail sales easing back in December, traditionally a strong month due to Christmas shopping is worrying investors, especially given the UK economy’s dependence on strong consumer spending.
|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.|
Any pressure from weak retail sales data was offset by encouraging post Brexit plans from Bank of England Governor Mark Carney. Carney said in front of the Treasury Select Committee that he intends for EU banks to remain in Britain operating almost as normal post Brexit. They will function on a branch basis similar to US and Japanese banks. This should encourage the banks to stay operating in the UK supporting the financial system and preventing massive job losses.
The US tax reform bill is completing the final stages before it is expected to hit President Trump’s desk for signing before Christmas. The bill was passed by the Senate, by a majority of 3 votes. It now has to go back to the House due to a procedural snag, which analysts are not expecting to cause any major problems. So finally, almost a year after taking office, President Trump is set to claim his first legislative victory and one that showed save corporate American $1.5 trillion.
The focus of the market could quickly switch back to economic data today, as the US economic calendar is fairly busy with high impacting releases which could cause volatility for the dollar. City analysts are anticipating that the US third quarter GDP figures will show economic growth of 3.3% year on year. This strong reading could be supportive of the dollar. However, analysts are forecasting that inflation will remain low, which will continue to cause concern in the US Federal Reserve over raising interest rates next year
|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.|
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.