The pound US dollar exchange rate rallied on Monday, benefiting from solid U.K. housing data, whilst investors also looked ahead to today’s jobs data. The pound hit a peak of US$1.4344, its second strongest level against the dollar since the Brexit referendum in June 2016.
|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.
Demand for the pound initially increased following data from Rightmove, which showed that the average price of a house in the UK hit a record high in April. Prices increased a further 0.6% month on month, adding to March’s 1.5% increase. The stronger than forecast data is a sign that banks are still lending and that consumers are confident enough to purchase, despite Brexit uncertainties. This is an encouraging sign for the U.K. economy and helped to lift the pound.
|Why does strong economic data boost a country’s currency?|
|Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.|
Also supporting the pound in the previous session, was growing optimism that the Bank of England (BoE) will raise interest rates at the May monetary policy meeting. Today investors will focus on UK jobs data to get a clearer picture of whether a Spring hike is likely. Analysts are expecting that average wages in the UK increased 3% in the three months to February. Inflation in February slipped to 2.7%, so should wage growth hit 3%, wages will have grown more than inflation, easing the squeeze on consumers. Households have been experiencing high levels of inflation and lower wage rises for an extended period of time. This pressure on paychecks has led to reining in of spending by the consumer. Any signs that this pressure could be easing could encourage the BoE to hike and therefore boost the pound.
|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.|
The dollar was broadly out of favour on Tuesday despite concerns of an escalation of the US led military action Syria easing. Russia and Iran, Syria’s principal supporter, are not expected to retaliate easing geopolitical fears, at least for the time being.
Data showing that US retail sales rebounded in March after 3 months of declines failed to lift the dollar. Retail sales grew 0.6% in March suggesting that consumer spending was once again building momentum. Consumer spending accounts for over two thirds of the US economic activity meaning it is very significant for US economic growth.
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.