GBP/USD: Will US GDP Data Boost the Dollar vs. Pound?

The pound clocked up further losses versus the dollar in the previous session. The pound US dollar plummeted a further 0.5% on Thursday, adding to Wednesday’s 0.8% loss. The pair is down again in early trade at US$1.2812 as the pound continues to hover around 6-week lows.

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.

Concerns over Brexit continue to dampen demand for the pound. With very little UK economic data released this week, investors were able to focus their full attention on Brexit and the high level of uncertainty that remains. As the clock ticks a growing number of reports are highlighting the damaging impact that a no deal Brexit will cause.

The most recent report came from The Institute of Economic and Social Research. The report advised that a no deal Brexit would mean that the UK economy would grow by an sluggish 0.3% in 2019. Comparably, the report also stated that if the UK could secure a trade deal which preserves current trade agreements, the UK economy would grow by a much healthier 1.9% next year. These figures highlight the need for a Brexit deal to be achieved and the risks to the economy under a disorderly Brexit.

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.

Dollar Benefits From Safe Haven Status

The dollar rallied in the previous session as investors moved into the safe haven to shelter from big swings in the US equities market. As concerns over global growth, US corporate results and geopolitical tension rise, investors have looked towards the world’s reserve currency as a safer bet.

Durable goods numbers orders in September, which also boosted the dollar. This shows that US consumers are still buying big one off items, a positive sign for the economy.

Today investors will be looking ahead to the US GDP figures. Analysts are expecting US economic growth to have slowed to 3.4% in Q3, down from 4.2% in Q2. Whilst this is a slowdown in economic growth from the previous quarter, it still represents extremely solid growth. However, as concerns over global growth have heightened over recent weeks, weaker than forecast GDP data could bring the dollar sharply 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.

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