GBP/USD: Will US GDP Lift The Pound Dollar Exchange Rate?

With the dollar still suffering from the Fed action the day before and the pound cheering strong data, the pound charged higher versus the US dollar in trading on Thursday. The pound US dollar exchange rate rallied to a peak of US$1.2707, before easing back 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 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.

The pound moved higher on the back of strong UK retail sales. UK retail sales increased 3.8% in November, significantly ahead of the 2.3% analysts had forecast, and an increase from October’s 2.8%. The jump in retail sales was partly thanks to increased spending on Black Friday. However rising wages and falling inflation also means that the pressure is easing on the consumer. As a result, consumers are able to spend more. Usually rising wages, strong retail sales and inflation above 2% would lead the Bank of England to hike interest rates. This BoE made it clear that this was not on the agenda.

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.

The Bank of England kept rate on hold as analysts anticipated on Thursday. The central bank also warned over Brexit uncertainties intensifying over the past month. With absolutely no clarity as to how the UK will leave the EU: deal, no deal or no Brexit, it is impossible for the central bank to do anything other than wait and see. The BoE didn’t even give guidance as to how data was shaping monetary policy, because the only factor that really matters right now is Brexit. The pound fell off its highs versus the dollar on the uncertainty.

Today investors will look towards the public sector net debt. Analysts are predicting that it will fall from £8 billion to £7 billion.

Dollar Stages Modest Rebound From Fed Fall

The dollar recovered from a sharp sell off across the previous session. Stronger than forecast jobless claims boosted the dollar which had been lower following the Fed’s policy announcement.

Today investors will be looking towards US GDP data. Analysts are expecting economic growth to print at 3.5%. Investors will be particularly sensitive to any reading that prints below expectations. With concerns growing over the health of the global economy and the Federal Reserve still planning on hiking rates twice next year, the dollar could fall sharply should GDP show signs of slowing.

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.

This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Inc., Currency Live or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. Consult our risk warning page for more details.

This article was initially published on from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.