GBP/USD: Can The UK Service Sector Buck The Trend & Boost The Pound vs. Dollar?

Weak UK construction data sent the pound lower versus the dollar, before Brexit optimism helped lift the pound US dollar exchange rate. The pair finished the session at US$1.2858.

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 pound slipped in early trade in the previous session following weak UK construction data. Activity in the construction sector dropped more sharply than what analysts had been expecting in August. The UK construction Purchasing Managers’ Index (PMI) dropped to just 52.9 in August, significantly below July’s 55.8 reading and well short of analysts forecasts of 54.9. The weak data sent the pound southwards.

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

However, sterling could be on the rise again today as investors focus their attention on the UK service sector activity data. The service sector accounts for over 80% of activity in the UK economy, making it by far the most dominant sector. Analysts are expecting activity to have picked up in this sector. If this is the case it would be good news for the UK economy which has shown signs of weakness this week after UK manufacturing and construction data fell short of expectations.

Encouraging Brexit rumours also boosted the pound vs. dollar rate, towards the end of the session. Rumours circulated that the EU could make some encouraging remarks over UK Prime Ministers Chequers’ Brexit plan. If so, this would be evidence of progress in Brexit negotiations, which could offer Theresa May some support as she faces increasing pressure from Eurosceptic Members of Parliament. Brussels is also expected to give the UK Prime Minister a stern warning over the Irish border issue, which remains unresolved. The EU will most likely want a final proposal from the UK over avoiding a hard border in Ireland in just a few weeks.

US Manufacturing Hits 14 Year High

The dollar moved higher in the previous session as trade fears continued to dominate and as investors cheered strong US manufacturing data. US manufacturing smashed analysts’ expectations by unexpectedly increasing to 61.3. Analysts had been expecting output from the sector to have eased in August. Fears that President Trump’s trade policies would hit manufacturing proved unfounded and instead robust demand sent the manufacturing gauge to a 14-year high, lifting the dollar.

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.

Today there is no high impacting US data. Investors will most likely keep and eye on trade tension headlines, whilst also preparing themselves for the US jobs data at the end of the week.

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