After Wednesday’s flash crash, the pound climbed steadily higher versus the dollar. The pound US dollar exchange rate picked itself up off the 20-month low of US$1.2438 to reach a peak of US$1.2639. The rally was thanks to a weaker dollar, rather than any notable strength in the pound.
|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.|
Pound traders digested disappointing UK construction data. However, construction activity hitting a three-month low in December after reaching a four-month high in November wasn’t enough to disrupt the pound moving higher versus the dollar. UK construction activity slowed to 52.8, down from 53.4 as commercial projects dried up amid Brexit uncertainties. Usually, data which is weaker than analysts are forecasting sends the pound 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.|
Today investors will be looking at UK service sector PMI data. The service sector is by far the most dominant sector in the UK economy, so investors will be watching how the sector is holding up under the strain of Brexit uncertainty. The service sector is expected to have climbed slightly in December to 50.7, up from 50.4 in November. Even if the data does show a small lift in service sector activity, it is unlikely to make a big difference to the pound whilst the Brexit impasse remains.
The pound could come under increased pressure as Brexit will once again be moving towards the centre stage. The Brexit deal is to enter Parliament for debate again next week. The Irish DUP party, whose support UK PM Theresa May needs to push Brexit through, are insisting that they still have principle objections to Theresa May’s deal.
The dollar was on the back foot on Thursday as investors become increasingly doubtful of the Fed’s ability to hike rates in 2019. Instead, market participants are starting to price in a possible rate cut from the US central bank.
US ISM Manufacturing data came in significantly below what analyst had been forecasting. As US data continues to underwhelm, investors are unable to see how the Fed can hike rates.
Today all eyes will be on US jobs data. Analysts are expecting the US Non-farm payrolls to show that 180,000 jobs were created in the US in December. Up until now, the US labour market has remained strong, which has provided confidence to the markets and the Fed. Should the jobs data fail to match analyst expectations the dollar could drop lower.
|How does the non-farm payroll (NFP) affect the US dollar?|
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the good and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes up the currency’s worth.|
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