The pound fell 0.7% versus the US dollar across the previous week. The pound US dollar exchange rate dropped to ten month low of US$1.2957, before climbing in the last two sessions into the weekend. The pound has started off higher as the markets open on Sunday evening.
|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 fell across the previous week as a slew of soft data led pound investors to believe that an August interest rate hike, by the Bank of England (BoE), was no longer certain; in fact, it was starting to look doubtful. With inflation at a 1 year low, wages growth slipping and retail sales growth also declining, the BoE could now struggle to justify a rate hike at the monetary policy meeting in two weeks’ time. As interest rate hike hopes fell, so did the value of the pound.
|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.|
This week’s UK economic calendar is quiet. This means the pound will be vulnerable to Brexit headlines and to the political situation in the UK. Half way through this week ministers will go on a six-week break. Something which couldn’t come soon enough for UK Prime Minister Theresa May, who is still struggling to hang onto power. A recent poll showed that just 16% of voters approved of Theresa May’s plan for Brexit, with 34% preferring ex-foreign secretary Boris Johnson to lead the UK through Brexit. Any sign that Boris Johnson could make a move for power could send the pound tumbling.
|How does political risk have impact on a currency?|
|Political risk drags on the confidence of consumers and businesses alike, which means both corporations and regular households are then less inclined to spend money. The drop in spending, in turn, slows the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. Signs that a country is politically or economically less stable will result in foreign investors pulling their money out of the country. This means selling out of the local currency, which then increases its supply and, in turn, devalues the money.|
The dollar fell sharply at the end of last week after President Trump commented that he would prefer a weaker dollar. This breaking of tradition, whereby of US Presidents don’t talk about the value of the dollar unnerved investors. The fact that this was then followed by the Chinese setting the Chinese yuan at the lowest level versus the dollar since 2016, made investors believe that the US – Chinese trade war was turning into a currency war. As a result, the dollar lost ground. The dollar has continued to move lower at the start of the new week.
With an EU trade mission on its way to Washington this week, trade is expected to stay in focus, at least for the beginning part of the week before the US GDP release will bring the economic calendar back into focus in the second half of the week.
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.