The pound fell in early trade following a surprising drop in growth of house prices. After falling across the morning, the pound rebounded in the afternoon, to close 0.2% down against the dollar at US$1.3999.
|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 sold off in the previous session after the release of the latest Rightmove House Price Index. House prices in January increased just 0.8% month on month, well below the monthly average. This is the second straight month that house prices have failed to grow at the average pace, fuelling concerns that consumers are holding back on spending and lacking in confidence. Buyers who can spend, are opting to wait until Brexit uncertainties clear, which is bad news for the UK economy and therefore for the pound as well.
|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 odds of an interest rate hike by the Bank of England (BoE) in the spring season have increased. However, market participants are instead focusing on Brexit uncertainties, which is preventing the pound from rising. There is confusion within UK Prime Minister Theresa May’s cabinet about what direction the post-Brexit UK-EU relationship will take. Furthermore, doubts have been cast by EU Chief Negotiator Michel Barnier as to whether the post Brexit transition period will even take place. This would be the worst-case scenario for the UK economy and therefore the pound.
The US was closed for Presidents Day public holiday, meaning that there was limited news and few traders at their desks to drive US dollar movement. Even so, the US dollar managed to hold its ground after rallying on Friday.
Today looks set to be another quiet day for the dollar, with investors focusing their attention on the release of the Federal Open Market Committee (FOMC) meeting minutes on Wednesday. Investors will be looking to see if the Federal Reserve is taking a more hawkish approach towards monetary policy under the new leadership of Jerome Powell. Furthermore there have been numerous changes to the committee which could suggest that more monetary tightening could happen throughout 2018.
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.