After falling heavily in early the pound managed to claw back some lost ground later in the session. The pound fell steeply after the UK jobs report to touch a low of US$1.3451. This is the weakest that the pound has traded against the dollar since December last year.
|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 UK jobs report was decidedly mixed. On the positive front unemployment in Britain remained constant in March at a multi decade low of 4.2%. Wages grew 2.9% the three months to March, slightly up from the previous months’ 2.8% and in line with expectations. Given that inflation in March was 2.5%, wage growth is outpacing price rises, which is good news for the UK consumer. The should mean that the squeezed UK consumer will start to feel some relief over the coming months, theoretically speaking, they should start spending more.
|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.|
However, the pound did not rally because investors chose to focus on the fact that the number of people seeking unemployment benefits increase by 31.2k, well ahead of the 7.8k that had been anticipated by analysts. This is important because an increase in claimant numbers is often a negative signal for the future labour market, potentially pointing to higher unemployment is just around the corner. This reading shook the confidence of investors, who then sold out of the pound.
Today, there is no new data for the UK, so investors will continue to digest the jobs report from the previous session.
The dollar showed signs of strength across the board in the previous session. US retail sales printed in line with what analysts had been anticipating at 0.3%. After last week’s slight disappointing inflation reading, investors were looking for some reassurance from the retail sales figures. These figures were sufficiently good to do just that.
Strong retail sales lifted investors inflation expectations going forward, which also boosted rate hike expectations. As a result, the dollar charged higher. Only towards the end of the session did the dollar ease back as market participants looked to take profits on trades after a strong rally.
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.