GBP/USD: UK Inflation To Drive The Pound Higher vs Dollar?

The pound edged steadily lower versus the dollar in the previous session. Brexit woes overshadowed stronger U.K. data, pulling the pound US dollar exchange rate to a low of US$1.30

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 brushed off data which showed that the U.K. labour market was still in good shape. Unemployment remained steady at 3.9%. Wage growth printed at 3.5% you in the three months to February. Whilst January’s figure was also revised higher. With inflation at 1.9% in February, households enjoyed strong wage growth in real terms. There was an area of concern on the labour report. That was the jump in jobless claims. The number of people filing for unemployment benefit hit 28.1k, well above the 20k that analysts had been expecting.

The number of jobless claimant counts had been steadily increasing for some time now. This could be an early warning that the tightening of the UK labour market could start to slow. Still, the positives of the report outweighed the negatives. The fact that the pound didn’t move higher suggests that investors are doubtful that the Bank of England will hike rates on the stronger data. This would be because of Brexit

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 pound investors will look towards inflation data. Analysts are forecasting that U.K. inflation ticked higher to 2% in March, up from 1.9% the previous month.

Strong US Earnings Boost The Dollar

Weak data from the US failed to hit demand for the dollar. US manufacturing and industrial production both missed analysts’ forecasts. Industrial production unexpectedly fell in March, recording a loss for the third straight month amid ongoing concerns over the health of the global economy.

Investors were also keeping a close eye on earning season in the US. The big banks continue to report their number. After record breaking results from JPMorgan before the weekend, Blackrock also impressed today. The strong numbers from corporate America boosted hopes of strength still remains in the US economy.

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 market participants will look toward the release of the Beige Book. This provides anecdotal evidence on the current economic conditions in different states. Any signs that the US economy is slowing could increase fears of a broader slowdown.

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