After climbing in early trade, the pound tumbled sharply versus the US dollar on Thursday. The pound US dollar dumped close to 1% after comments from Bank of England governor Mark Carney unnerved investors.
|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 remained relatively strong, even climbing midway through the session, despite UK retail sales missing analysts expectations. City analysts had been predicting that retail sales would increase by 1.4% year on year in March, the actual figure was 1.1%. Meanwhile, on a monthly basis retail sale slid -1.2% instead of just the -0.6% forecast by analysts.
Analysts had been assuming that as wage growth had outpaced inflation in February, consumers would have been out spending. But due to the extremely harsh weather conditions that Britain experienced, shoppers were staying inside, rather than hitting the high street.
This was the third piece of high impacting data for the UK that fell short of analysts’ forecast. Investors had been predicting that the BoE would raise interest rates in May. However, the BoE governor Mark Carney managed away those hopes by reminding the markets that there are other months that the BoE could raise rates — in other words don’t expect one in May. The pound dived as hopes from Spring interest rate hike, which had been as high as 90% tumbled sharply.
|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 trade higher versus its peers on Thursday, as market participants boosted the odds of a more aggressive path of hiking from the Federal Reserve. Federal Reserve policy makers have been giving speeches across the week and on the back of those speeches, investors are starting to believe that the Fed may start to take a more hawkish approach. As a result, the dollar charged higher, even though economic data was actually slightly softer than forecast.
Today, the US economic calendar is, light, as it has been for most of the week. Investors will once again look towards Fed speeches to direct trading.
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.