As confidence grows that the Bank of England will raise interest rates on Thursday, the value of the pound increased versus the US dollar. The pound US dollar exchange rate increased by 0.2% across Monday, to hit a high of US$1.3151.
|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.
Pound investors are focused on the BoE monetary policy meeting on Thursday. Analysts are forecasting a rate rise of 0.25%; however, this is still not certain, leaving the pound fluctuating as optimism rises and falls. Whilst on one hand, the economy is picking up again after a slow difficult first quarter, there are also many uncertainties that lie ahead with Brexit which could make policy makers more cautious than usual.
On Monday consumer credit data showed that credit card spending in the UK increased, as did mortgage approvals, which were at a 5-month high and consumer confidence, which is at the highest level since September 2016. These are all signs that the UK economy is in a favourable position for an interest rate rise. As optimism for a hike increased 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.
Today there is no UK economic data to be released. Brexit and domestic politics headlines will also be lacking owning to the summer break. Pound traders will continue to look towards the interest rate decision.
The dollar was out of favour on Monday, dropping lower versus its peers at the start of a busy week. There are several high impacting events for the dollar over the next few days, including inflation data today, the Federal Reserve meeting and then the US jobs report on Friday.
The personal consumer expenditure (PCE) is the preferred measure of inflation by the Federal Reserve. Analysts are expecting that core PCE will remain constant at 2% year on year in June. This is in line with the Federal Reserve’s target, which was hit in May for the first time in 4 years. Analysts are not expecting the Fed to hike rates when they meet in August, as they hiked rates at the last meeting. However, the Fed are still expected to hike twice more this year, so investors will be looking for confirmation that inflation remains elevated, to merit further rate hikes.
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