A strong start in the previous session saw the pound US dollar exchange rate climb to a peak of US$1.3608. The exchange rate then gave up some of the gains as the dollar strengthened across the later part of the session.
|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.
Pound traders are looking ahead to today’s employment data; however, it comes to a backdrop of disappointing UK data. For the past month the pound has been struggling thanks to a streak of poor data, including a weak Gross Domestic Product (GDP) reading. This wiped away any remaining optimism surrounding a Spring rate hike from the Bank of England (BoE). This was then confirmed by the BoE which voted to keep rates on hold, until they have further data. This will then allow the central bank to assess whether the recent economic soft patch is just temporary or something more structural.
Today investors will be looking for some slightly more encouraging data from the UK labour market report. Analysts are expecting UK unemployment to remain constant at multi decade lows of 4.2%. Average earnings will be the central focus and is the figure that the Bank of England will look most closely at. Analysts are expecting average wages to have increased by 2.9% in the three months to March, up from 2.8% the previous month. Given that inflation was at 2.5% in March, a print of 2.9% for wages growth will mean wages are growing faster than prices rising. This would point to an easing of pressure on the UK consumer’s income, which would be good news for the UK economy. This could help the BoE consider hiking rates later this year.
|How does strong jobs data boost the currency?
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the good and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.
Demand for the dollar was weak at the beginning of the previous session. Despite no high impacting data, the dollar staged a reversal, making back some of the earlier losses. Today investors will be looking to US retail sales. After a slightly disappointing inflation reading last week, dollar traders will be hoping that retail sales numbers will do a better job of increasing rate hike expectations. Analyst are forecasting that retail sales will increase by 0.3% month on month in April, slightly less that the 0.6% the previous month. A stronger reading today could help lift the dollar higher.
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.