After three weeks of gains the pound finally fell versus the dollar last week. The pound US dollar exchange rate dropped 0.8% as a lack of UK economic news or data left the pound languishing versus a stronger dollar. This week the dollar has started weaker as fears of a trade war pushed the exchange rate to $1.4050.
|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 was broadly out of favour last week, following a quiet week on the UK economic calendar and after a shortage of Brexit headlines. The only high impact release last week was the UK fourth quarter GDP which showed that the UK economy grew at a lacklustre 1.4%. This makes the UK one of the slowest growing major economies.
|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.
This week is once again short on high impacting UK economic data releases. Although there may be just enough data to keep pound trader’s attention. First up this week, is UK manufacturing purchasing managers index. Manufacturing has been experiencing a bit of a boom thanks to the Brexit weakened pound. The fall in the pound following the Brexit referendum has made UK products cheaper for overseas buyers, boosting demand. Analysts are expecting the manufacturing PMI for March to have eased back slightly to 54.7 from 55.2 the previous month. Any signs that manufacturing activity is slowing by more than this could pull the pound lower.
The dollar was under pressure as trading kicked off for the new week. Fears of a full-on trade war between the US and China pushed investors out of the dollar. Last week fears had eased over a trade war becoming reality, after the White House had suggested that there could be room for exceptions to Trump’s recently announced tariffs on $60 billion worth of imported Chinese goods, if China opened its market to the US. Behind the scenes talks had boosted hopes that an agreement was drawing near.
However, yesterday’s response by China that it will place retaliation tariffs on US imports has reignited fears. A 25% tariff on US frozen pork will ensure those farming states that voted for Trump in the 2016 election will be hardest hit.
Any degree of trade war will be bad news for the US economy which is why the dollar is sinking lower.
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.