The pound fell versus the dollar for much of the session on Thursday, as investors reassessed the probability of a rate hike from the Bank of England (BoE). However, comments from President Trump knocked the dollar later in the day pulling the pound US dollar exchange rate back above US$1.30.
|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 has lost over 1.5% versus the US dollar across the week. Brexit fears and weak UK data have weighed on demand for sterling. Retail sales were the latest figures to hit the pound. Retail sales in June were significantly worse than what analysts had been predicting. On a monthly basis retail sales fell 0.5%, down from May’s 1.4% increase and short of the 0.2% growth forecast by analysts. Year on year, retail sales grew just 3%, down from 4.5% in May and short of the 3.5% expected by analysts.
With inflation at a 12 month low, average wage growth slipping and the consumer staying away from the shops, the conditions don’t look appropriate for the Bank of England to justify a rate hike. As optimism for a hike dipped, the pound dropped heavily.
|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 data continues to flow out of the UK. This time investors will look towards public sector net borrowing, which could create some volatility.
The dollar experienced a late dive on Thursday after President Trump said that he was not in favour of further rate rises. There is an unwritten rule and tradition that Presidents do not comment on the valuation of their currency or the action of the Federal Reserve. Trump broke this rule by expressing his discontent over additional rate rises from the Fed. Although, he did also say that he would leave the Fed to do what they felt was best.
Knowing that the President wants a weak currency, resulted in a large fall in the value of the dollar. This is most likely a knee jerk reaction because the reality is Fed Chair Jerome Powell is unlikely to change his plan for interest rates because the President wants a weaker dollar.
There is no high impact US data due for release so dollar traders will instead be looking out for any headlines from Trump which could drive dollar direction.
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