A new, dovish Bank of England (BoE) policy maker sent the pound lower on Tuesday, whilst easing trade war fears boosted the dollar. As a result, the pound, US dollar exchange rate declined, hitting a low of US$1.3207.
|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 sunk after cautious comments from the new BoE policy maker Jonathan Haskel. Jonathan Haskel will be replacing known hawk Ian McCafferty after August. Unlike hawk Ian McCafferty, Jonathan Haskel appears to sit firmly on the other side, the dovish side, of the fence.
Whilst Mr Haskel agreed with the BoE that rates will probably need to be gradually raised, he was also very clear in expressing that he saw no urgency in doing so. He instead focus on the persistently weak data from the UK economy and the fact that he considered there to be more slack in the UK labour market. Given that market participants view the new member as significantly more dovish and cautious than Ian McCafferty, this has impacted the expected path of rate of rate rises going forward.
|Why do raised interest rates boost a currency’s value?|
|Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.|
Ian McCafferty will vote at the August BoE monetary policy meeting, where investors are optimistic that the central bank could raise rates. However, the concern is if the BoE decide not to hike, with an extra dove on the committee after August, a rate hike could be pushed further into the distance.
Today Bank of England Governor Mark Carney will speak about the Financial Stability Report, potentially causing some volatility.
The dollar soared higher on Tuesday, taking back its losses from Monday. Comments from Trump’s top trade advisor Peter Navarro helped ease trade war tensions, which had been running high. Mr Navarro insisted that the US was not making plans for Chinese investment restriction, despite earlier reports that was the case. Whilst trade fears continue to be a central focus for market participants, there was less negativity on Tuesday.
US trade data will be under the microscope today as investors look at the impact on the trade balance that the trade tensions have had so far. Analysts are expecting an increase in the balance rather than the decrease that Trump will be hoping for.
| —– |
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Inc., Currency Live or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. Consult our risk warning page for more details.
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.