The pound US dollar exchange rate plummeted over 150 points on Friday, equivalent to over 1%. The heavy fall came as the inflation outlook for the US moved higher. By the end of Friday, the pound was trading at $1.4113 against the dollar, wiping out all the gains from Thursday’s session. Despite the heavy fall, the pound is still trading comfortably above $1.40, which is considered an important level for the pair.
|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 set off to a poor start to Friday after data showed that Construction activity slowed in the U.K. The slowdown has been put down to Brexit uncertainties, holding up project decisions. The soft data came after figures on Thursday also showed manufacturing activity to have increased at a slower pace than what analysts had been expecting. Manufacturing and construction don’t make up a huge part of the U.K. economy. However, poor readings can act as a precursor for soft service sector activity, which is a much more substantial contributor to the U.K. economy.
UK service sector activity data is due to be released this morning. Analysts are forecasting that growth in the sector slowed in January, as investors reined in their spending amid continued pressure from high inflation and falling wages in real terms. Should the reading come in below the 54.1 predicted, the pound could fall further against the dollar.
|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.
The dollar rallied into the weekend after the US labour report on Friday, surprised to the upside. 200,000 jobs were created in the US in January, ahead of the 180,000 analysts had been expecting. However, of more importance to the market, average hourly earnings shot up by 2.9% on an annual basis, significantly ahead of the 2.6% analysts have anticipated. The acceleration in wage growth could encourage the US Federal Reserve to hike interest rates sooner and also more frequently during 2018. Low wage growth had been a point of concern for Fed because it points to lower inflation down the line. Now the possibility of inflation is increasing dollar in strengthening.
|How does the non-farm payroll (NFP) affect the US dollar?
|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 up the currency’s worth.
This week sees several US economic data releases, starting today with US non-manufacturing purchasing managers index. The week ahead also sees a steady flow of Federal Reserve officials hitting the airwaves giving g further insights as to what to expect from the Fed in the coming months.
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.