The pound briefly spiked through US$1.34 versus the US dollar on Thursday following impressive UK retail sales data. However, sterling was unable to maintain its strength, even against a broadly weaker dollar and headed towards the close at US$1.3385.
|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 jumped higher versus the dollar as investors cheered strong UK retail sales. After weeks of softer than forecast data, stronger retail sales numbers lifted the pound, which had been languishing at 5-month lows versus the dollar. Retail sales rebounded sharply, increasing 1.6% month on month, smashing analysts’ expectations of a 0.5% increase and a solid recovery from March’s 0.5% decline in sales. Whilst the unseasonably harsh weather in February and March kept shoppers away from the high street, the warmer weather in April had the reverse effect.
|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.
As wage growth is now outpacing inflation, consumers will slowly start to feel the pressure on their purses ease. Gradually this should translate into stronger retail sales. Strong retail sales figures tend to indicate that inflation will pick up later down the line. As higher inflation often results in an interest rate rise, retail sales tend to be a closely watched reading.
Today investors will look towards UK Gross Domestic Product (GDP) data for further clue as to the health of the UK economy. Analysts are predicting that the economy will have grown a sluggish 1.2% on an annual basis in the first quarter. A weaker reading could send the pound lower.
The dollar was broadly out of favour in the previous session, albeit more in favour that the pound. Geopolitical tensions kept investors away from the dollar. Firstly, Trump has issued an investigation into the US automobile industry, a threat for more trade tariffs, in the same way Trump did with the Steel and Aluminium industry. This level of protectionism could be damaging to the US economy and world trade. As a result, the dollar weakened.
Also weighing on the dollar was President Trump’s cancellation of the Summit with North Korea’s leader Kim Jong Un. This came just hours after Kim Jong Un announced the destruction of North Korea’s nuclear testing site, in a move which will surely infuriate the North Korean leader. Investors’ immediate reaction was to sell out of the dollar.
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.