GBP/USD: Will UK Wage Data Pull Pound Lower vs. Dollar?

The pound initially moved higher on Monday, before falling lower later in the session as Brexit fears returned. The pound US dollar exchange rate hit low of US$1.3217, before edging marginally higher towards the close.

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 attempted to extend Friday’s gains on Monday, however Brexit news cut any move northwards short. The two principal problems regarding Brexit were; firstly, UK Prime Minister Theresa May completely ruled out the possibility of a second referendum. Pound investors had always had the hope that if Brexit looks like it was becoming too messy or was going to be too much of an economic strain, at the least there could be a second referendum. Today that possibility was ruled out.

Secondly Theresa May caved into her Brexit hard line rebels, accepting amendments to the customs bill, which could make it impossible for her Brexit deal to be accepted by the EU. This was yet another weakening of position by the Prime Ministers, whose authority has been badly hit by recent events. A hard, no deal Brexit is looking increasingly likely, which is weighing on demand for the pound.

Why is a “soft” Brexit better for sterling than a “hard” Brexit?
A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e. immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound-friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value.

Today, market participants will look towards a slew of UK economic data which could give an indication as to the likelihood of an interest rate rise in August. UK jobs data, including unemployment and average wage growth will be under the spotlight. Analysts expect unemployment to remain at 4.2% and more importantly average wages to also remain stagnant at 2.5%. Should this be the case the pound could fall.

How does strong jobs data boost the currency?
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 the worth of the currency higher.

Dollar Edges Lower As US Russian Relations Improve

The dollar was broadly lower in the previous session as investors looked towards Trump’s meeting with Russian leader Vladimir Putin. The meeting appears to have gone well, with both sides saying that the US Russian relations had been at their worst since the cold war but are now significantly improved. A geopolitical risk decreased the demand for the US dollar decreased, thanks to the dollars safe haven status. This means in time of lower perceived risk the dollar is less desirable.

Today investors will look towards an appearance by the US Federal Reserve’s Jerome Powell in a biannual appearance before the Senate Panel. Once again dollar traders will be looking for confirmation of 4 rate rises across the year.

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