Data showing strong economic growth in the US ensured that the US dollar charged higher versus the pound on Wednesday. As a result, the pound US dollar exchange rate declined across the course of the session hitting a low of US$1.4075.
|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.
News that UK retail sales declined sharply in March sent the pound lower. Adverse weather conditions, on top of the challenging economic climate which investors are facing meant shoppers stayed away from the UK High Street. The Confederation of British Industry data showed retail sales slipped for the first time in 5 months. Retail sales data can be very volatile. However, a slow down in sales is concerning as the UK economy is heavily dependant on the UK consumer spending.
|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 look ahead to UK GDP data. Analysts are forecasting that the UK economy will have grown 0.4% quarter on quarter and 1.4% on an annualised basis. This would mean that the UK economy among the slowest growing major economies. The pace of growth has slowed significantly due to Brexit. There are still many uncertainties which have resulted in investment being withheld and plans put on hold until there is more clarity over the future. Furthermore, a squeezed consumer, spending less, will have also contributed to slower economic growth. Should Britain’s GDP print be weaker than what analysts have predicted, the pound could fall lower.
The dollar moved higher in the previous session following the release of the US GDP. The US economy grew by 2.9% in the final quarter of 2017, on an annualised basis. This is above the 2.7% that analysts had anticipated for this revision and above the 2.5% previously estimated. The strong growth does not yet include the benefits which the tax cuts will provide, as these only came into force as from the first quarter of 2018. The better than expected growth sent the dollar soaring versus its major peers.
Most high impact data is due today for the US. Investors will watch for the Personal Consumption figure, the Fed’s preferred measure of inflation. A strong read could increase the odds of an interest rate rise in June.
|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.|
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.