Owing to the Easter bank holiday and a quiet economic calendar, there were a distinct lack of drivers for the pound US dollar exchange rate on Monday. The pair slipped below $1.30 at the start of the new week, after dropping 0.7% in the previous week. The pound edged higher 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 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.
Demand for the pound weakened in the previous week, despite UK data broadly impressing. Data showed that the UK labour market remained solid, with average wages growing at the fastest pace in a decade. Wages grew 3.5% year on year, whilst unemployment remains at historically low levels of 3.9%. Strong wages is giving the UK consumer confidence to spend. Retail sales also surged 6.7% as households continued spending despite lingering Brexit uncertainties. UK inflation was the weak spot, but even that wasn’t disastrous, staying steady at 1.9%.
Despite upbeat data, the pound moved lower. This is because pound traders do not believe that the Bank of England will hike interest rates with the Brexit deadline looming, even if data is showing signs of improving.
|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.
This week, the focus will return squarely back to Brexit as ministers returned from the Easter recess. Pressure has increased on the pound as the chances of UK Prime Minister Theresa May being ousted from power have increased. The most recent reports say that the Conservatives are most likely to request that Theresa May leaves by June. Increased political uncertainty could keep the pound out of favour.
The dollar was little changed on Monday, owing to the Easter holiday, there was very little for currency traders to sink their teeth into. Financial markets across Hong Kong, Australia and many European countries were closed on Monday. Whilst currency markets continued to trade, they were pretty much at a standstill.
The focus this week for dollar traders will be on Friday’s GDP data. This will give dollar traders an insight as to the health of the US economy. After retails impressed last week, investors are hopeful that the US economy is holding up well.
Today new home sales will be the central focus. New home sales hit a 7-month high in the previous month. However, analysts are forecasting a -3% decline compared to the previous month. A weak print could weigh on demand for the dollar.
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