With Brexit and US—Sino trade talks in focus, the pound US dollar exchange rate experienced another volatile session on Thursday. The pair plummeted in early trade hitting a low of US$1.2969, before rallying to a peak of US$1.3036 later in the US session. The pair snapped a four-day losing streak, closing in positive territory (0.01% higher) for the first time this week.
|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.|
Cross party Brexit talks continued last night. Doubts grow over how much progress is actually being made after leader of the opposition Jeremy Corbyn called on UK Prime Minister Theresa May to move her red lines in order to secure a deal. His comments were then followed by those of the government spokesperson who said that there was still “significant work to be done”. What is becoming increasingly clear is that any deal is still a long way off. As optimism of a cross party Brexit deal faded, the pound came under pressure.
After a very quiet week as far as UK economic data is concerned, things look set to pick up on Friday. UK GDP data will attract some attention away from Brexit headlines. Analysts are expecting that the UK economy grew at 1.8% year on year in the first quarter, and 0.5% quarter on quarter. These figures would show that the UK economy was holding up well despite lingering Brexit concerns. This could help offer support to the pound.
|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.|
The dollar fell broadly lower in the previous session following weaker US inflation data. The producer price index (PPI) showed that inflation at wholesale level weakened in April. PPI slipped to 0.2% month on month and 2.2% year on year. These figures come ahead of today’s consumer price index unnerving investors, even though analysts are expecting the CPI numbers to show inflation ticking higher.
Inflation continues to be a point of concern for dollar traders and the Federal Reserve alike. Whilst the Fed are happy with the level of economic growth, they are not seeing sufficient inflationary pressure to warrant a rate hike. This has kept the dollar softer and is why the Fed are not hiking interest rates right now.
|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.|
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