GBP/USD: A Hawkish Fed Boosts Dollar Sharply vs. Pound

The pound maintained its strength through versus the dollar through most of Wednesday. However very hawkish comments from the Fed proved too much for the pound to stand up to. Dollar strength saw the pound US dollar exchange rate fell sharply towards the end of the session.

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.

UK Prime Minister dispassionately defending her Brexit Chequers plan and linking Brexit to the end of austerity offered support to the pound. Theresa May used the closing of the UK Conservative party conference to present the latest version of her Chequers plan, after Brussels rejected the original. Theresa May called for her party to unite behind her in her talks with Brussels, or risk chaos. She also promised that austerity would end next year if the UK secured a Brexit deal.

An end to austerity would mean that government spending would be on the increase. Higher spending creates inflationary pressures making a future interest rate rise more likely. This, in addition to Brexit optimism boosted 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.

Pound traders focused intently on politics, brushing off service sector pmi’s that were weaker than what analysts had been expecting. Activity in the service sector ticked lower in September to 53.9. Lower than the 54 that analysts had forecast and a significant decline from August’s 54.5. Given the dominance of the UK service sector in the UK economy this is not good news. The weaker service sector combined with weaker construction pmi means that the third quarter could see a slowdown in economic growth.

Powell Boosts The Buck

The dollar was broadly in favour in the previous session as data showed that the US economy continues to be in great shape. US non-manufacturing index jumped to 61.6, smashing analyst expectations of 58. This is the second consecutive month of strong non-manufacturing figures, as respondents to the survey remain positive about current business conditions and the economic outlook.

The already strong dollar received a final boost from Federal Reserve Chair Jerome Powell. In a speech on Wednesday evening, the Fed Char said that he sees a remarkably good outlook for the economy. investors interpreted this to mean that the Fed could look to lift interest rates by more than what investors had initially been expecting. This boosted the dollar.

Today jobless claims and durable goods orders will be in focus ahead of the non farm payroll report on Friday.

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