With most US traders away from their desks on Wednesday for Independence Day, the pound edged steadily higher versus the US dollar. In a quiet session, the pound US dollar exchange rate hit a peak of US$1.3249, it highest level in over a week.
|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 service sector activity unexpectedly jumped in June, growing at its fastest rate in 9 months. The service sector pmi was 55.1, up from 54 ion May, whereby any figure over 50 represents expansion. The service sector is by far the UK’s most dominant sector, contributing to around 80% of economic activity. A solid improvement in the service sector pmi in June indicates that economic growth in the second quarter of the year could be stronger than initially thought. This supports Bank of England (BoE) beliefs that the UK economy would pick up in the second quarter after a slow start to the year.
The impressive service sector data comes following strong manufacturing and construction sector data earlier in the week. Market participants are growing increasingly hopeful that these better than forecast prints will persuade the central bank that the UK economy is strong enough to sustain a rate rise later this month. Consequently, the pound pushed higher on Wednesday.
|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.|
Today there is no influential economic data. Investors will start to focus back on Brexit ahead of a key meeting between the UK Prime Minister and her cabinet this weekend. The aim of the meeting to reach an agreement over the future EU-UK post Brexit relationship.
US Federal Reserve Minutes in Focus
The US was on a public holiday, Independence Day on July 4th. The dollar continued trading, but volumes were low and there were no high impacting economic releases. The dollar continues to trade to the backdrop of trade wars. On Friday the tariffs that the US have been threatening and the retaliation tariffs from China are due to come into effect.
Prior to that, today, the minutes from the Federal Reserve monetary policy meeting will be released. Analysts are expecting the minutes to show an upbeat discussion over the health of the US economy. Analysts are also expecting that the Fed will have discussed the potential impacts of a trade war. This conversation could unnerve investors and cause volatility in the dollar.
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