The pound moved slowly lower versus the dollar in the previous session, before dropping sharply later in the session. The pound US dollar exchange rate dropped 0.46% on Thursday, snapping a four day winning streak and hitting a low of US$1.3066.
|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 USDHere, £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 GBPIn 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.|
Brexit optimism had boosted the pound over recent sessions. Reports and rumours had been circulating that a Brexit deal was imminent. Today the reports kept coming. However, ministers stepped in to downplay such suggestions that a deal will be ready by next Monday. This dampened the mood towards the pound which edged lower.
Today investor attention will be back on the UK economic calendar. A barrage of data is due to be released including manufacturing figures, industrial production numbers and trade balance data. However, the most closely watched release will be the UK GDP numbers. Analysts are expecting Britain’s economy to have grown by 1.5% year on year in the third quarter. Quarter on quarter analysts are expecting 0.6% growth, up from 0.4%. Given the uncertainty that the UK economy is still facing over Brexit, these figures are solid. Should the data print at these levels then the pound could push higher.
|Why does strong economic data boost a country’s currency?|
|Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.|
The dollar traded higher on Thursday as investors continued to digest the Midterm election results in the US. The Democrats flipped the House of representatives, taking it from two years of Republican control. The dollar initially sold off on the results, on Wednesday. However, by Thursday the dollar had regained all those losses.
Investors quickly switched their attention to the Federal Reserve. As expected, the Fed kept rates on hold and remained on track to hike interest rates by 25 basis points in December. The central bank gave an upbeat assessment of the US economy, noting that unemployment had fallen as economic activity and consumer spending remained strong. A strong economy and inflationary pressures mean that the Fed expect to continue to hike next year. Market expectations of further hikes pushed the dollar higher.
|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.|
Today investors will remain focused on the US economic calendar with economic sentiment under the spotlight. Sentiment has been particularly high in recent months. Analysts are expecting sentiment to dip marginally, although this is unlikely to impact on the dollar given that it will remain as historic highs.
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