The pound’s spike higher back towards US$1.30 was short lived on Wednesday. The pound quickly gave back gains following strong US inflation figures and as Brexit nerves took hold. The pound US dollar exchange rate ended the previous session pushed back below US$1.29 to a low of US$1.2843.
|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 initially fell lower versus the dollar in the previous session. UK CPI data showed that inflation fell by -0.8% month on month in January. On an annual basis inflation slipped to 1.8%. This is the first time in two years that inflation has fallen below the Bank of England’s 2% target. Lower inflation will be well received by households who have had paychecks squeezed through higher inflation since the Brexit referendum. However, inflation falling short of the BoE’s 2% target will not encourage the central bank to tighten monetary policy anytime soon.
|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 remains in focus with the negative impact of a no deal Brexit becoming increasingly more apparent. Ford warned of the catastrophic consequences of a no deal Brexit as it steps up plans to move production abroad in the case of a no deal Brexit. Ford’s revelation comes just days after Nissan pulled production in the UK of their latest model due to Brexit uncertainty. The negativity sent the pound lower.
Parliament could attempt to take more control over the Brexit process today with more debates and votes in the Commons. As UK Prime Minister Theresa May has already said there will be another vote on 27th February, this removes some of the pressure off today’s votes.
The dollar picked up on Wednesday, resuming its rally after pausing on Tuesday. The dollar moved higher following the release of stronger US inflation data. The US consumer price index remained unchanged for a third consecutive month in January, held back by cheaper petrol prices. However, core inflation, which removes more volatile items such as food and fuel, unexpectedly moved 0.2% higher. The fifth straight month of gains. Stronger inflation boosts the value of the dollar by raising expectations of a Fed rate hike.
Investors will now look towards US retail sales for further clues as to the health of the US economy. Economists often consider retail sales data an indication for future inflation. Strong sales numbers could lift the dollar further.
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.