GBP/USD: Pound versus Dollar Awaits US & UK GDP Data

Yesterday in the morning, the pound rose against the dollar to reach a high of 1.3930 and then quickly fell to 1.1391. Thereafter the pound saw a slightly turbulent session before rising to 1.3923 this morning and it has since then remained at that position.

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 saw a slight drop against the dollar possibly due to a slight drop in consumer confidence numbers. Analysts had expected the consumer confidence to drop by 7 points but the actual drop was about 9 points which would have negatively affected the sentiment for the pound.

The US dollar has a strong of not-so-strong economic data in its way, because of which it lost its ground versus the pound. First, the initial jobless claims data was released, which is an indicator of unemployment in the country. The data was less than the expected figure, but still showed that a substantial number of people were still unemployed. This was followed by disappointing data regarding wholesale inventories and durable goods. Both of these are indicators of economic health in the production sector. Since the actual figures were slightly lower than expected, the US dollar weakened in value versus 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.

Bank of England (BoE) Governor Carney is due to give a speech in London today. Should his comments indicate an interest rate rise in the near future, the pound will further strengthen its ground versus the euro. More importantly, however, is the US Gross Domestic Product data that is due today. GDP is one of the most important indicators of economic health and a higher than expected growth rate of US GDP will most likely help the dollar win back its losses as investors will renew their faith in the economic prospects of USA in the near future. Similarly, UK is scheduled to release its GDP data today which will potentially impact the value of pound versus the dollar.

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.

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