GBP/USD: Pound Sinks To Fresh Yearly Low vs. Dollar

Despite a strong start for the pound on Tuesday, weakness soon set in and dollar strength quickly took over. The pound US dollar exchange rate hit a high of US$1.2827, before sinking to fresh yearly lows of US$1.2705.

The pound started the previous session on the front foot as investors waited for the UK labour data. However, sterling fell after the release and continued to fall for the rest of the session.

UK unemployment unexpectedly dropped to 4% in June, from 4.2% in May. This is its lowest level since 1974/5. Furthermore, the number of workers from the European Union reached its lowest level since records started. Yet this tightening of the UK labour market failed to lift wages in the way that the Bank of England had been predicting. UK wages grew 2.4% in the three months to June, below the 2.5% that analysts had been predicting, even though there were 829,000 vacancies in the jobs market. The pound traded lower following the data.

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.

Market participants will now look to UK inflation data, as measured by the consumer price index, CPI. Analysts predict that UK inflation will tick higher in July to 2.5%, up from 2.4% in June. Core inflation, which removes more volatile items such as food and fuel is expected to remain steady at 1.9%. This suggests that the increase inflation is probably down to rising oil prices, something that the BoE tends to look through when considering hiking interest rates on higher inflation.

Dollar Soars Ahead of Retail Sales

The dollar was back in favour in the previous session, bounding higher versus its peers. The dollar rose even though the Turkish Lira crisis was showing signs on stabilisation. As the Turkish Lira strengthened, investor fear of contagion to other assets and emerging markets has eased. Yet the dollar has continued to climb.

Today investors will look towards US retail sales for clues as to the health of the US economy. On the whole data coming from the US is painting a picture of a strong robust economy. Analysts expect retail sales today to support this picture. A strong reading could lift the dollar higher.

Why does strong economic data boost a country’s currency?
Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.

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