Disappointed pound traders sent the pound lower versus the US dollar on Thursday. The pound US dollar exchange rate moved higher before the BoE rate announcement, then fell lower post announcement stabilising at US$1.3030.
As analysts had expected the Bank of England (BoE) voted unanimously 9—0 to keep interest rates on hold at 0.75%. Investors looked towards the central bank statement and press conference with Mark Carney for clues. However, the BoE remained balanced in its view which disappointed investors.
The central bank raised its growth outlook for the UK economy for 2019, 2020 and 2021. However, it also cut the inflation forecast which pushed the pound lower. Whilst BoE Governor Mark Carney advised that the global economy was showing signs of improving, he also highlighted problems with the domestic market. Mark Carney informed that business investment was falling, yet firms were still hiring. Taking all things into account, the BoE remained neutral and this disappointed investors.
|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 investors will turn their attention back towards the UK economic calendar. The UK service sector PMI will be in focus. Analysts are forecasting that activity in the UK service sector rebounded in April after falling into contraction in March. Signs that the service sector has returned to expansion territory (PMI above 50) would be encouraging, particularly given the sectors dominance in the UK economy.
The dollar traded higher in the previous session as investors digest more strong US data ahead of the US non-farm payroll report. US factory orders increased by the most in 7 months in March data showed. Factory orders jumped 1.9%, above the 1.6% analysts expected. The increase comes after two straight months of declines and paints a brighter picture of the US manufacturing sector. The strong data boosted demand for the dollar.
Today investors will look towards the US non-farm payroll report. This is the most highly anticipated report across the month. Analysts are forecasting that 181,000 new jobs will have been created in April. Wages are expected to have increased 0.3% and unemployment is due to remain steady at 3.8%. Should the figures come in stronger than analysts’ expectations, the dollar could rally.
|How does the non-farm payroll (NFP) affect the US dollar?
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the good and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes up the currency’s worth.
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