After struggling earlier in the session, the pound bounded higher on Thursday, helped by an optimistic Bank of England (BoE), despite timed down economic forecasts. The pound US dollar exchange rate rallied to a high of US1.2996 before easing back to US$1.2948 to 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.
As analysts had widely expected, the Bank of England kept interest rates on hold. The central bank trimmed growth forecasts, which sent the pound tumbling lower. The BoE’s growth expectation for the UK economy was revised down to just 1.2%, the weakest level in a decade. Growth forecasts were slashed from 1.7% just three months earlier. The central bank laid the blame for the worsening outlook on “Brexit fog”, which is creating tensions.
With just 50 days to go until Brexit and no Brexit deal agreed, the probability of a no deal, disorderly Brexit is increasing. The Bank of England governor warned of the economic consequences of a hard Brexit. However, Mark Carney was not all doom and gloom. His upbeat tone in the press conference helped lift the pound to session highs despite the forecast downgrades. This boosted rate hike hopes, strengthening the pound.
|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 there is no high impacting economic data for the UK. This will leave Brexit headlines to drive the pound. UK Prime Minister Theresa May visited Brussels on Thursday in an attempt to convince the EU to reopen negotiations on the Irish backstop arrangement. Something the EU have continually refused to do. Once again, the EU rebuffed Theresa May’s demands.
Theresa May and her cabinet will spend the next few days meeting leading EU figures to convince them to change the deal. Brexit headlines will keep the pound volatile as the Brexit deadline nears.
The dollar traded broadly higher on Thursday, although lower than the pound. Concerns over the health of the global economy resurfaced with vigour, adding to worries over US — China trade relations. As a result, investors looked to buy into safe havens. The dollar is the reserve currency of the world and therefore is considered a safe haven, benefiting in times of heightened uncertainty. Moves by investors into the safer dollar continued overnight.
Today there is no high impacting data due for release leaving dollar investors looking towards US — China trade developments. President Trump has said he has no plans to meet with China’s President Xi Jinping before the trade truce deadline of March 1st
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 TransferWise.com 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.