As investors’ expectations for an interest rate cut by the Federal Reserve increased, the US dollar declined, pushing the pound US dollar exchange rate higher. The pound pushed to a high of US$1.2712. This is the first time that the pair has traded over US$1.27 in a 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.

The pound nudged higher as pound traders cheered the prospect of a post Brexit US — UK trade deal. President Trump said that he was looking forward to agreeing a “phenomenal” trade deal with the UK, once it breaks free from the European Union. This is the clearest that the President of the United States has been about his intentions for a trade deal after Brexit.

With the possibility of a no deal Brexit increasing, news of a potential trade deal with the US in the case of a no deal Brexit was well received.This would offer support to the UK economy at a time when it would need it. On the back of this optimism the pound moved higher.

Today investors will look towards UK service sector pmi data. Analysts are expecting activity in the service sector to remain stagnant in May, as Brexit uncertainty continues to paralyse business decisions. Given the dominance of the UK service sector in the UK economy, a weak reading could send the pound sharply lower.

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

Dollar Drops As Fed Stands Ready To Cut Rates

The dollar was out of favour for a second straight session on Tuesday. Investors are growing increasingly convinced that the Federal Reserve’s next move will be an interest rate cut. Fed Chair Jerome Powell signalled that the central bank stood ready to cut interest rates should the economy take a turn for the worse amid the ongoing US — Sino trade dispute. Jerome Powell’s speech followed similar comments from other Fed officials. This is usually a sign that the Fed wants to prepare investors for a shift in policy.

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 look towards US service sector data for more clues as to how the US economy is holding up. Analysts are predicting that activity in the dominant sector remained steady at a healthy 55.5. Any signs of a slowdown could send the dollar lower still.

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