The pound pushed higher versus the dollar for the third straight session on Friday. The pound US dollar exchange rate climbed 0.3% to US$1.3348. This resulted in a weekly gain of 0.3% for the pair, as the pound claws back from a recent 6 month low versus the dollar.
|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.
UK manufacturing surprised investors and analysts by activity in the sector increasing more than market participants had been expecting. Manufacturing continued to rebound from a 17-month low in March. The Purchasing Managers Index (PMI) increased to 53.4, up from 52.9 in April. The stronger than forecast number lifted the pound.
|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.
However, scratching beneath the surface and the figures are not quite as rosy as they first appear. The increased production contributed towards an increase in unsold stock rather than to fulfil orders. New orders were at an 11-month low, which doesn’t bode well for the sector.
Today investors will continue to focus on purchasing managers index, but this time for the construction industry. Activity in the construction sector rebounded in April after a very weak March. Analysts are anticipating a reading of 52.5, whereby anything over 50 indicates expansion in the sector. Should the reading beat analysts forecasts the pound could rally.
The dollar is seem kicking the new week off slightly out of favour as fresh fears over trade war fears emerge. At the end of last week, the Trump administration announced that negotiations between the US and its closest allies, Canada, Mexico and EU had failed. This means that the US was ready to levy trade tariffs on its closest allies.
Yet despite the trade concerns, strong US jobs data kept the dollar buoyant at the end of last week. 223,000 jobs were created in May in US, well above analyst’s expectations of 200,000. Furthermore, the level of unemployment unexpectedly dropped to an 18 year low of 3.8%.
|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.
Over the weekend, trade talks with China have also concluded without any deal, bringing the US and China a step closer to tariffs and making a global trade war increasingly more likely. As a result, the dollar is dropping. Market participants consider that the trade war will be detrimental for US trade and therefore the US economy.
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.