GBP/USD: Trade War Fears To Affect Pound vs Dollar

Despite some volatility in the pound US dollar exchange rate, the pound ended the session more or less flat versus the dollar. Renewed US trade war fears and gloomy UK economic data prevented the rate from making any progress one way or the other. The pound moved towards the end of the session at US $1.3290, as it continues to hover around 6-month lows.

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 investors looked towards the recent Gfk consumer confidence data for further insight into the health of the UK economy. Whilst consumer confidence moved 2 points higher in May, it still remained firmly in negative territory. With wage growth outpacing inflation consumers are starting to feel more positive about their personal finances. However, this was not enough to overshadow concerns over the wider economy. The overall tone of the report was sufficiently negative to keep the pound broadly out of favour.

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

Today’s focus will be on the UK manufacturing purchasing managers index (PMI). Analysts are expecting growth in the manufacturing sector to have slowed again in May to 53.5. This will mark the lowest level of growth in 18 months. Furthermore, it will be the 6th straight monthly decline for manufacturing activity, as it falls from November’s high of 58.5. Weakness in the sector could see the pound fall lower.

US Jobs Report Up Next

The dollar was under pressure in the previous session as the Trump administration announced trade tariffs on its closest allies. After negotiations between the US and Canada, Mexico and EU failed, steel tariffs of 25% and aluminium tariffs of 10% will be put in place by the US. This move greatly improves the chances of a trade war potentially risking global economic growth.

The EU has already stated that it will retaliate against the tariffs by the US. President of the European Commission Jean-Claude Juncker announced that the bloc would go ahead and impose duties on US products including peanut butter and motorbikes.

Today sees the release of the US labour department jobs report. Analysts are expecting 200,000 new jobs to be created and the unemployment rate to remain steady at 3.9%. Meanwhile, analysts are expecting the wages aspect of the report to increase at 2.7% year on year. A strong reading could lift the dollar higher.

How does the non-farm payroll (NFP) affect the US dollar?
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 up the currency’s worth.

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