The pound surged versus the US dollar on Thursday, hitting a fresh 7 week high of US$1.3298, before giving back some gains before the close.
|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.
Retail sales increased in August by more than what analysts had been expecting. Retail sales jumped 3.5% in August, significantly ahead of the 2.3% increase that analysts had pencilled in. The hot weather and increasing wage growth meant that consumer kept on spending across the latter part of the summer.
The solid figure, comes following stronger than forecast inflation data earlier in the week, both of which support the BoE’s decision to raise interest rates last month. Given that economists consider higher retail sales to be a predictor of stronger inflation later down the line and stronger inflation results in higher interest rates, the pound jumped
|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.|
The pound was also lifted by Brexit optimism as UK Prime Minister and her European peers met for a second day of informal talks in Salzburg, Austria. Comments early on pointed to increased chances of the UK achieving a Brexit deal.
However, the optimism was short lived, as European Council President Donald Tusk unexpectedly laid down an ultimatum, that Theresa May needs to find a solution to the Irish border issue in the next four weeks or Brexit talks will collapse. His comments raised concerns that the UK will have a disorderly, no deal hard Brexit from the EU.
|Why is a “soft” Brexit better for sterling than a “hard” Brexit?|
|A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e. immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound-friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value.|
The dollar experienced broad based weakness in the previous session. The dollar dropped to a two month low as optimism over global growth increased and trade war fears eased. US — Sino trade tensions eased after tit for tat measures between the two powers were not as bad as market participants had initially feared, leading investors to sell out of the safer US dollar in the search of riskier assets such as equities. The US stock market hit a fresh all-time high.
Today investors will look towards US PMI data for further clues over he health of the US economy.
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Inc., Currency Live or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. Consult our risk warning page for more details.
This article was initially published on TransferWise.com from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.