After briefly spiking higher, the pound ended the previous session flat versus the dollar. The pound—US dollar exchange rate rallied to an intraday high of US$1.3095 before closing out at US$1.3040. The pair was seen moving marginally lower in early trade on Friday. Although, the pound is currently 1% higher versus the dollar across the week.
|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 soared higher on Thursday following the release of data which showed that the UK’s public finances received a boost ahead of the Chancellor’s s Spring Statement. The UK government received £14.9 billion more income from taxed in January than it spent; the largest surplus for the government since records began.
January is typically a good month for government tax receipts because it is when the self employed submit their self-assessment. Even so, the strong reading was still well ahead of what analysts were forecasting. The impressive data boosted the pound.
|Why does strong economic data boost a country’s currency?|
|Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.|
Today the UK economic calendar is light. Investors will turn their attention back to Brexit headlines. UK Prime Minister Theresa May has been in talks with EU Commission President Jean-Claude Juncker. However, hopes of progress receded after Mr Juncker said he does not believe a no deal can be avoided.
Dollar Stronger Despite Weak Data
The dollar was slightly stronger across the board in the previous session despite a slew of dismal data. Most notably US durable goods orders grew a lacklustre 1.2% . This is significantly short of the 1.7% analysts had forecast. US manufacturing activity figures fell from 54.9 in January to 53.7 in February. A larger fall than market participants had been predicting. Homes sales figures also added to the growing sense of weakness in the US economy.
The weak data has boosted investor fears that the US economy is starting to slow dramatically. This is unnerving investors. Furthermore, the Federal Reserve are not likely to start hiking rates again this year if the US economy is slowing. This would usually send the dollar lower.
|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 is a quiet day as far as US economic data is concerned. Investors will look towards US — Sino trade talk news.
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