The pound US dollar exchange rate closed 0.3% lower on Monday at US$1.3027. Brexit news caused a spike to US$1.31 mid-session. However weak data and concerns over the impact of Brexit on the UK economy weighed heavily on demand for sterling.
|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 fell in early trade on Monday as weak construction pmi figures hit demand for sterling. Construction activity in the UK declined to almost a halt in January. The construction pmi fell to a 10-month low of 50.6, whereby 50 separates expansion from contraction. The weak data comes after manufacturing figures also showed a marked slowdown. Brexit uncertainty is
hampering progress and hitting confidence across the economy.
The pound briefly spiked higher late in the afternoon on the news that the UK would ease customs checks on goods coming from the EU in the case of a no deal Brexit. Usually no deal Brexit planning unnerves pound traders. However, this move by the government to attempt to keep goods flowing across the borders has been well received.
Today investors will continue watching for Brexit headlines. News that the Bank of England and the EU have agreed a deal concerning London clearing houses is boosting the pound in early trade. This will protect the derivatives clearing business in the case of a hard Brexit.
Attention will also go towards the UK service sector activity data. After weak construction and manufacturing data, analysts are assuming that the service sector will have slowed as well. The UK service sector is by far the dominant sector of the UK economy. A slowdown here will mean that the UK is almost certainty looking at slower economic growth at the start of 2019.
|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.|
The dollar was showing resilience at the start of the new week, despite weaker data. Factory orders and durable goods orders were both weaker than what analysts had been predicting. Durable goods are usually closely watched because they are expensive items which consumers buy when they are feeling confident about the state of their finances and the outlook. Durable goods increased just 0.7% in November, below the 1.5% analysts forecast. Factory orders were also weak declining by -0.6%.
With the US government shutdown in the rear view mirror. Investors will digest further US data today. US manufacturing numbers will take centre stage. The dollar may struggle to remain resilient amid further signs of weakness
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