GBP/USD: US Consumer Confidence at 18 year high

The GBP/USD exchange rate peaked in Tuesday’s trade at 1.2934, the highest seen since Wednesday of last week. However, strong US consumer confidence data, and investor concerns about Brexit meant that the gains in sterling were later reversed.

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 USDHere, £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 GBPIn 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 first half of August saw a strong positive trend for the dollar in general, but since August 15th, prices have been falling against most major currencies. However, yesterday’s US Consumer Confidence Data showed a near 18 year high, which is expected to be interpreted as a positive for the US economy, suggesting steady growth is likely for the rest of 2018. US consumers are feeling good, which typically leads to increased spending and offers a boost to the economy. These signals are taken as positive signs by investors and can therefore lead to a rally in currency prices.

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.

The impact of strong economic data was clearly seen in Tuesday’s trading as the dollar rallied, against sterling in particular. The rebound in dollar pricing was not so strong against other major currencies, with Brexit worries also acting to suppress the pound’s value.

Investors in the UK will be following Brexit announcements and industry reaction carefully. Since the UK government released details of their plans for the event of a no-deal Brexit, industry analysts and thought leaders have been digesting this possibility. The UK government retain an upbeat tone, saying that a deal is the most likely outcome – and plans are in place should the UK crash out of Europe with no agreement. However, this level of political and economic uncertainty is limiting investor confidence, with a watch and wait attitude prevailing.

Why is a smooth Brexit good for the pound?
A smoother Brexit would be a scenario in which the economic consequences of leaving the European Union are minimised. This is favourable for the pound because the less the Brexit impact on the economy, the more likely that foreign investors will remain interested in the UK. Foreign investors need sterling to invest in the country and so the more GBP is purchased, the higher the demand and, thus, an increase in the currency’s value.

Looking ahead, US investors are awaiting the Quarter 2, 2018 US GDP figures, which are expected to show growth in the region of 4%. Analysts expect there to be little upside if figures outstrip expectations – but there could be an adverse market reaction if the data shows slower growth than is expected. This could exacerbate the challenges the dollar is currently facing. In addition to upcoming economic data, markets are watching for further news on trade negotiations, both within North America as NAFTA is renegotiated, and also amid ongoing talk of a potential trade war.

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