GBP/USD: Federal Reserve & China Trade Talks In Focus

The pound was higher versus the US dollar in the previous session, closing up 0.1% at US$1.3269. The pound US dollar exchange rate is giving back those gains in early trade this morning.

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 moved higher in the previous session thanks to impressive UK jobs data. UK unemployment unexpectedly fell to 3.9%, its lowest level since 1975. UK wages also remained elevated at 3.4% for a second consecutive month in the three months since January. In January inflation was 1.9%. This means that households enjoyed solid wage growth in real terms.

Economists consider strong wage growth to be an indicator for higher future inflation. As inflation expectations lift so do investors’ expectations for an interest rate rise. This boosted 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.

Gains in the pound were capped by Brexit uncertainties. Brexit headlines unnerved investors keeping a lid on any potential rally. EU Chief negotiator Michel Barnier set out the prerequisites for an extension to Article 50. By mid-April Theresa May must decide what she will do. Either, take the risk of a short extension and attempt to get Parliament to back her deal by then or risk no deal Brexit. Under this arrangement she won’t have the possibility of extending further, due to European election meaning that the UK will no longer have its seats.

The alternative would be a lengthy delay to Brexit which could stir up political and economical havoc.

A More Cautious Fed To Hit The Dollar?

The dollar traded broadly lower on Tuesday as investors looked ahead to the Federal Reserve monetary policy announcement today. Market participants believe that the Fed will keep interest rates unchanged. Analysts also predict that the Fed will reduce its outlook of 2 rate hikes across 2019 to 1 owing to weaker economic data. The prospect of 1 less rate increase across the year pulled the dollar lower over.

Today, the dollar was edging higher. As reports suggest that US — Sino trade talks are turning sour, investors are once again seeking the safety of the dollar. As the world’s reserve currency, in times of increased geopolitical tensions, the dollar tends to move higher.

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