A more hawkish sounding Bank of England (BoE) boosted the pound to a high of US$1.4066 early in the previous session. Dollar strength evened out the gains in the pair later in the day, pulling the pound US dollar exchange rate back below US$1.40.
|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 Bank of England kept interest rates on hold, as expected in the previous session. However, the central bank also hinted towards sooner and faster interest rate rises through the year. This has led market participants to believe that the BoE could be looking to raise rates as soon as May, in addition to the already planned November hike.
BoE Governor Mark Carney said that global growth has been faster than what the bank had initially anticipated, which has helped lift economic growth in the UK. As a result, the BoE increased its economic projections for the UK from 1.5% to 1.7%. The central bank also said that it expected inflation to remain elevated and above the set 2% target. Stronger growth and continued high inflation provide the right circumstances for the BoE to hike rates, although Brexit uncertainties will prevent the bank adopting a very aggressive stance to hiking.
|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.|
Today there is a full economic calendar for pound traders to focus on. Investors will be looking for confirmation that the UK economy is strong enough to sustain a rate rise as soon as May. Data to watch includes, industrial and manufacturing production, construction output and NIESR economic growth estimate.
Investor appetite for the dollar increased in the later part of the previous session. Investors cheered more good new regarding the US economy, after data showed that the number of Americans filing for unemployment benefits dropped unexpectedly last week, falling to its lowest rate in almost 45 years. The tightening of the labour market, through higher job creation boosts hopes that wages could also increase at faster rate this year, which strengthened the dollar.
|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.|
There is not high impacting US data for release today, so the dollar could find itself struggling for direction. Sterling is likely to be the driving forecast in the pound US dollar exchange rate today.
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.