GBP/USD: Pound Slipped vs. Dollar Despite Spending Promises In Budget

The pound continues to decline from the previous week against the stronger dollar. After falling 1.8% in the previous week, the pound fell a further 0.2% versus the dollar. The pound US dollar exchange fell to a low of US$1.2797. However, the pound is moving cautiously higher as trading on Tuesday begins.

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 Chancellor of the Exchequer Philip Hammond presented his Budget to Parliament late on Monday afternoon. The Office of Budget Responsibility (OBR) revised growth forecasts for 2019 to 1.6% from 1.3%. Growth in 2020 and 2021 was revised higher to 1.4%. Whilst this was an improvement, by historical measures these figures are still weak. Furthermore, the OBR are forecasting under the assumption of a Brexit deal. Currently there is no Brexit deal and talks are still at a standstill. This makes the forecasts questionable at best.

This was the Budget that was the beginning of the end of austerity. Mr Hammond promised more spending, with the biggest giveaways since 2010. However, this is only if a Brexit deal gets done. The pound slipped 0.2% through the course of the Budget.

Today there is no influential data for pound investors to focus on. Instead, investors will continue to digest Philip Hammond’s budget, whilst also looking ahead to Consumer confidence data on Wednesday and the Bank of England rate decision on Thursday.

Dollar Lifted on Strong Inflation

The dollar traded higher in the previous session. With geopolitical tensions easing slightly, investors were able to switch their attention back towards the US economic calendar. Inflation, in the form of Personal Consumption Expenditure (PCE) was under the spotlight on Monday. Analysts had expected core PCE to have increased 0.1% month on month in September. The actual figure was 0.2%. On an annualised basis, inflation remained steady at 2%. This is inline with the Fed’s target level and comes following data on Friday that showed the US economy was growing at a robust 3.5%. Data from the US continues to show that the US economy remains strong and on track for further interest rate rises from the Fed.

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.

Investors will keep their focus on the US economic calendar, which is particularly busy this month. Today US consumer confidence will take centre stage. Analysts are expecting confidence to have slipped slightly in October to 136, although it still remains at historically high levels.

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