The pound surged higher versus the dollar on a double whammy of good news on Tuesday. The pound US dollar exchange rate rallied over 1.4% to a peak of US$1.3047. This is over 200 points higher than the nadir hit in trading on Monday. The pound then slipped back below $1.30 towards the close.
|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.|
The pound started the previous session off on the front foot following encouraging UK wages data. Figures showed that average earning excluding bonuses increased by 3.2% in the three months to September. This is the ahead of analysts’ expectations of 3.1% and is the fastest pace of growth in a decade. The high wage growth supports the Bank of England’s view that the U.K. job market has no more spare capacity. Furthermore, it supports the central bank’s view that a rate rise could be needed in the case of an orderly Brexit.
|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.|
Brexit continues to be the principal driving force for the pound. News that Theresa May will be looking to get the text to the Brexit Treaty signed off today by her cabinet gave the pound a large boost. After all the uncertainty over whether a deal would be agreed pound traders are celebrating that the U.K. is a step closer to an orderly Brexit. However, the task faced by Theresa May is enormous, with several hardline Eurosceptics threatening to resign over the deal, which they consider to be Brexit only in name.
Brexit and inflation figures will ensure that the pound has another volatile session today. Analysts are expecting UK inflation to reach 2.5% in October up from 2.4%. However, Brexit will hog the limelight. signs of the cabinet agreeing to May’s Brexit plan could boost the pound.
After several strong sessions the dollar was broadly on the back foot on Tuesday. The dollar had rallied hard since Friday, boosted by hawkish comments from the Federal Reserve. The Fed gave an upbeat assessment of the US economy which lifted hopes of further interest rate hiking across this year and next.
Today investors will be looking towards US inflation data. Analysts are expecting inflation in the US to increase to 2.5% in October, up from 2.3% in September. Analysts forecast that core inflation, which excludes more volatile items such as food and fuel with remain constant at 2.2%. A strong reading could help lift the dollar.
|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.|
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