Pound Climbs vs. Dollar As Fed Set To Hike Rates

The pound continued to climb higher versus the dollar in the previous session. This marks the third straight session that the pound has rallied against the US dollar. The pair hit a high of US$1.3175 after gaining over 0.3% across the day.

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.

Optimism towards the pound continued on Tuesday. This time comments from the Bank of England (BoE) were responsible for the increase in demand, rather than any Brexit news. BoE policy maker Vlieghe said that he considered that 1 or 2 interest rate hikes over the next year would be necessary if UK wages and productivity increased.

The comments from BoE policymaker Vlieghe whilst he was speaking at Imperial College Business School were particularly well received because Vlieghe is usually one of the more conservative or dovish policy makers on the Monetary policy committee. His views boosted hopes of a more aggressive monetary policy from the central bank, lifting the pound.

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 could struggle to maintain its strength today, as investors turn their attention to sales data released by the Confederation of British Industry (CBI). Analysts are expecting the CBI sales data to show that sales dropped sharply in September after a few very strong summer months. Any disappointment from the figures could drag sterling lower.

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.

Dollar Lower Ahead Of Fed Rate Decision

The dollar was broadly out of favour in the previous session, despite US consumer confidence jumping unexpectedly higher. Analysts had predicted that US consumer confidence would edge lower as concerns over trade tensions and higher inflation set in. However this wasn’t the case and confidence surged.

Trade tension also continue to have a large influence on the value of the dollar. With China and the US showing signs of escalating tensions, the dollar is losing demand.

Today all the attention will be on the Federal Reserve as they update the market on their monetary policy changes. Analysts are widely expecting the Fed to raise interest rates by 0.25% to 2.25%. This will be the third rate rise this year with analysts expecting another interest rate hike in December. Traders will be paying particular attention to the Fed’s plans for hiking rates next year. Should the Fed show they are keen to continue raising interest rates then the dollar could charge higher.

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