The pound headed steadily lower versus the dollar for a second straight session on Wednesday. The pound US dollar exchange rate dipped to a low of US$1.3030 before climbing marginally towards the close.
|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 was out of favour in the previous session after inflation data that will encourage the Bank of England to sit on their hands for a while longer. UK inflation failed to tic higher in March as analysts expected. Instead it remained steady a 1.9%. This surprised market participants given the strong wage growth that we have seen in recent months.
With Brexit uncertainties still lingering and inflation below the 2% target, the central bank have few reasons to consider hiking interest 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.|
Adding to negative news for the pound, VISA reported a reduction in consumer spending for a third straight month. Spending in March dropped by 0.2% year on year. This comes following a 1.2% decline in January and a 1.8% decline in February. Reduced spending means reduced inflationary pressures.
Today investors will look towards UK retail sales data for more details on how consumers how spending. Analysts are predicting that retail sales increased 4% in March, in another stellar month of spending after a 3.8% increase in February. Given VISA’s report, 4% could be a little optimistic. A weaker print could pull the pound lower.
The US trade balance falling for a third straight month boosted demand for the dollar. The US economy unexpectedly exported more bring the trade deficit down to -$49.4 billion instead of an increase to -$53.4 billion. The trade deficit was running around 7% lower at the start of this year compared to last year. Despite the decline, the rate is still hovering near record highs even though President Trump is pushing hard to bring it lower.
Today investors will digest a slew of US data. The most closely watched will be US retail sales and US services and manufacturing pmi data. This will provide further clues as to the health of the US economy.
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