The pound US dollar exchange rate traded within a tight range on Monday. At the start of the holiday shortened week, the pair traded through a range of just 40 points. The pound hit a high of US$1.3119 before dropping to US$1.3101 to close. The pair was pulling back further in early trade on Tuesday.
|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.
Pound traders were able to put Brexit drama and domestic political woes aside in the previous session. Parliament’s Easter break started, allowing pound traders to concentrate on other influential factors.
Whilst Monday was characterised by a lack of macro economic drivers, today economic releases will pick up again. The U.K. labour report will be under the spotlight today. Analysts are expecting unemployment in the UK to increase to 4% in February, up slightly from 3.9% in January. However, it will be the wage growth component of the report that will attract the most attention. Analysts are forecasting that average wages will have increased 3.5% year on year in the three months to February.
Inflation hovering at around 2% and average wages climbing puts consumers in a favourable position. A strong reading today could show that households are enjoying more disposable income which is beneficial for the U.K. economy. Higher wages and increased spending doing means stronger inflationary pressures, which could encourage the Bank of England to hike rates.
|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.|
The dollar traded broadly flat in the previous session amid a lack of catalysts. Today dollar traders will be looking towards the release of US industrial production and manufacturing data. Concerns over the health of the US and global economy have been lingering for months. Particularly in light of the US — Sino trade dispute. Manufacturing figures across the globe have taken a hit. That said, more recent data has been encouraging and investors will be keen to see that the stabilisation in data is continuing.
There are also several Federal Reserve policy makers who will be giving speeches. The Fed adopted a more dovish approach to monetary policy from the start of this year. Investors will be keen to see whether Fed policy makers are continuing with their patient approach.
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