The pound managed to close flat versus the dollar, after 11 straight sessions of losses. The pound-US dollar exchange rate just managed to stay above US$1.2723, the 14-month low hit on Friday, before clawing back lost ground to close at US$1.2760.
|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 foreign exchange markets were all consumed with the huge selloff in the Turkish Lira, which has now devalued 28% since the beginning of the month. The Lira sell off has unnerved currency traders across the board and there was a cautious tone to trading on Monday.
Pound traders will now look ahead to a busy week for the UK economic calendar. UK unemployment data and earnings figures will be in focus tomorrow. This will then be followed by inflation figures on Wednesday and UK retail sales on Thursday.
Analysts are expecting unemployment in the UK to remain constant in June at multi decade lows of 4.2%. Average earnings – including and excluding bonus – is expected to remain constant at 2.5% and 2.7% respectively. Following the Bank of England interest rate rise earlier in the month, investors will be keen to see whether the decision was justified. A fall in wages growth is an indication that inflation could decline going forwards, this would not be supportive of the rate hike and could put pressure on the pound.
|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 goods 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.|
Demand for the US dollar eased slightly in the previous session after being pushed to a 14 month high at the end of last week. The dollar has been benefitting from the Turkish Lira crisis, as investors have been buying into the dollar for its safe haven properties. This means that in times of geopolitical tensions or crisis, market participants tend to buy the dollar for security, given its reserve currency status.
Concerns are starting to grow that the fall in the Turkish Lira is spreading to other emerging market currencies. So far the South African Rand has also dropped heavily and the Argentine pesos has fallen for 6 consecutive days. As with the Lira, should these currencies drop heavily, corporates in these countries could struggle to pay foreign currency debts. As fears increase, the dollar could rise again.
Whilst developments in Turkey will continue to garner attention, market participants will look towards export data later today, before retail sales and manufacturing data on Wednesday.
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