GBP/USD: Pound Struggles Against Dollar As US Inflation Rises

Early yesterday, the pound dipped to a low of 1.1351 versus the euro. As the day progressed, the pound regained these losses and sharply jumped to 1.1400 for a little while and then fell again to more or less remain at 1.1345 throughout yesterday and early today. Despite these fluctuations, the pound continues to remain at its recent best, the highest in the last four months versus the euro.

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.

Political uncertainties continue to haunt the pound versus euro. The deadline for reaching a post-Brexit trade deal between the EU and UK is fast approaching and no proposal seems to be on table for now. Although the pound has been doing very good, today it felt the pressure from this mounting uncertainty. Some media outlets have also reported that there are rumors within UK’s political circle that a no-confidence vote may be moved against the Theresa May government. Should this occur, the political uncertainty in the UK, especially with regards to its negotiations with EU over the trade deal would continue to grow and weigh the value of pound downwards.

Why is a smooth Brexit good for the pound?
A smoother Brexit would be a scenario in which the economic consequences of leaving the European Union are minimised. This is favourable for the pound because the less the Brexit impact on the economy, the more likely that foreign investors will remain interested in the UK. Foreign investors need sterling to invest in the country and so the more GBP is purchased, the higher the demand and, thus, an increase in the currency’s value.

GDP figures from France and Germany

This morning finally also some good news coming out of the UK. France’s Gross Domestic Product (GDP) figures came in slightly higher than expect. The GDP measures France’s overall production and consumption of goods and services. Since France is a very important economy within the block, a positive growth in GDP helped the euro against the rise of the pound, although only marginally.

More important data is expected to come of Germany today in the form of Consumer Price Inflation (CPI). The CPI measures changes in the prices of consumer goods. It is the most reliable indicator of overall inflation in the country. This is important because it is one of the primary reasons for an interest rate hike. As one of the largest economies of the EU, this will also be a significant indicator of the health of EU economy and a higher than expected figure of CPI index will therefore give much-needed strength to the value of euro.

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.

Investors will continue to look at any new developments coming from UK’s political scene, especially at rumors about a possible no-confidence vote against Theresa May. However, today is also when Bank of England Governor Carney speaks before UK lawmakers. The governor’s speech is usually an indicator of possible interest rate hikes in the future. Should the tone of the speech be supportive of a rate hike in the near future, then the pound might continue to stay strong. For pound investors, this would be a welcome distraction from Brexit uncertainty for at least a short while.

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