The pound once again gained ground versus the dollar on Wednesday. Sterling received a boost from Bank if England official, Michael Saunders, whilst the dollar received a smaller uplift from mixed data. As a result, the pound US dollar exchange rate climbed higher, reaching a peak of US$1.3942 yet another post Brexit high.
|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.
After a soft start the pound moved higher versus the dollar following encouraging comments from Bank of England official, Michael Saunders. Mr Saunders stated that he expected unemployment to fall below 4% in 2018 as he believed the broader U.K. economy would hold up this year, despite Brexit uncertainties. The current unemployment rate is 4.3%, which means that the UK is close to full employment.
|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 U.K. economic calendar remains quiet today. However investors could continue assess the fallout from the collapse of construction giant Carillion. Carillion was for into liquidation on Monday with debts of £1.5 billion. It’s collapse has left 19,000 employees uncertain about their future and potentially 30,000 sub contractors unsure if they will receive payment for work done. The domino effect from the firms collapse could impact heavily on the U.K. construction sector and therefore the Uk economy. A weaker economy is not favourable for the pound.
The dollar was trading broadly higher, albeit lower versus the pound, as investors digested US data. US industrial production jumped unexpected to 0.9% in December, beating expectations of an increase of 0.4%. The industrial sector is finding support from the strengthening global economy combined with a weaker dollar, which are making US exports more competitive abroad. New factory orders recorded the highest increase since 2004.
|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.
Yet while industrial production was firing on all cylinders, manufacturing lagged behind, increasing a disappointing 0.1%, missing the 0.3% growth that analysts pencilled in.
Today US economic data continues to roll in which could create some volatility in the pound US dollar exchange rate. Potentially, the most important readings will be housing starts and jobless claims.
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.