The pound ended the day relatively flat versus the US dollar on Wednesday at US$1.3550. The pound US dollar exchange rate has only gained 0.1% across the week so far as investors trade cautiously ahead of the Bank of England’s (BoE) rate decision.
|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.
Today more than makes up for a very quiet week as far as UK economic data is concerned. The central focus will be the Bank of England’s Super Thursday, so called thanks to the release of the interest rate decision, the quarterly inflation report and a Press conference. Just a month ago pound traders were counting on a 90% probability of the Bank of England hiking rates. However, after a month of souring UK economic data the probability now sits at just 10%.
So with no rate hike expected by market participants, they will pay much more attention to what the BoE says, rather than what it does. Investors will be looking for the central bank to minimize the recent run of bad data as one off’s rather than any serious structural change to the UK economy. Furthermore, investors will want to see that the BoE are still considering hiking rates, possibly in August. Any signs that the BoE is cautious following news earlier in the month that the UK economy grew at the slowest rate in the first quarter since 2012, could send the pound lower.
|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 remained in a position of strength in the previous session as the fallout from Trump withdrawing from the Iran nuclear deal lifted the dollar. Also supporting the dollar has been increased hopes of a more aggressive Federal Reserve. Earlier in the week, US Fed Chair Jerome Powell warned investors that they should not be surprised by increased monetary policy tightening by the Fed.
With this in mind, investors will be watching the release of inflation data from the US. Analyst are expecting inflation, as measured by the consumer price index, to hit 2.5% in April, up from 2.4% in March. Analysts are expecting core CPI, which excludes food and fuel, to hit 2.2% up from 2.1%. Should these figures hold true, then inflation would be above the Fed’s 2% target for another month pointing to potentially more hikes to come. This could give the dollar another big lift.
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.