The pound’s relentless rally versus the US dollar stalled on Thursday, finishing lower on the day. The pound US dollar exchange rate initially charged higher, hitting a high of US$1.4345. The rate then eased back during the US session closing 0.84% lower at US$1.4123.
|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 rallying all week, the pound lost its shine on Thursday after data once again drew investors attention to falling retail sales. Data from the Confederation of British Industry (CBI) suggested that retailers experienced a very challenging festive period, with retail sales slipping over the Christmas period. They were the worst retail figures for four years as consumers struggled under the weight of rising prices and falling wages in real terms.
More recently, inflation has ticked lower and earnings are also on the rise. However, the moves will be too small for consumers to notice in their pockets right now. It could take several months of this trend before consumers notice the pressure easing. This means that retailers could still suffer in 2018.
|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.|
Today investors will be looking to gain a deeper insight into the health of the UK economy by means of UK GDP data. City analysts are forecasting that the UK economy remained steady with growth of 0.4% in the fourth quarter. However, they are also pencilling in annualised economic growth of just 1.4%, down from 1.7%. A softer GDP number could pull the pound lower.
The dollar turned positive in the previous session after a two day, 2% sell off. The rapid fall in the dollar earlier in the week, came after US Treasury Secretary Steve Mnuchin said that a weak US dollar was good for the economy. A weaker dollar would make US products cheaper for buyers of other currencies, therefore boosting the economy.
The reversal of the Mnuchin inspired losses happened after President Trump said that he sees the dollar strengthening going forwards, due to the US economy growing. He also said that he believed that his US Treasury Secretary’s comments were taken out of context. The dollar gained confidence that the US government was not pursuing a weak dollar policy to boost US trade.
It is unusual for a US President to speak about currency, however it is now the second time that Trump has done so. Today Trump will remain in the spotlight as he speaks in Davos, which could cause more volatility.
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.