Bank of England Governor Mark Carney gave the pound a boost on Thursday. Meanwhile weak US data fuelled market expectations of a Fed cut sooner rather than later. The pound US dollar exchange rate rallied to a high of US$1.2748, before easing into 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 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 traded broadly higher in the previous session. Speaking in Japan, BoE Governor Mark Carney said that the central bank would need to hike interest rates if the UK economy performs as it expects, in order to keep inflation close to the 2% target. This was some rare good news for the pound. However, Mark Carney also added that the central bank’s forecasts were made on the assumption of a smooth Brexit, which is by no means guaranteed.

The BoE Governor sounding slightly hawkish whilst other central banks across the globe are planning on cutting interest rates, encouraged investors to buy into the pound over other currencies.

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 is the last day in office for UK Prime Minister Theresa May. The leadership battle will now kick off for a new Tory leader and Prime Minister.

Non-farm Payroll To Boost Fed Cut Speculation?

Demand for the dollar dropped again on Thursday. Investors are growing increasingly convinced that the Federal Reserve will start cutting interest rates even as soon as this month. Initial jobless claims were slightly higher than what analysts were expecting. The softer data comes following weaker job creation in the private sector, with just 27,000 jobs created in May.

Today investors will be watching the US non-farm payroll report closely. This is the highlight of the economic calendar each month for many traders, but even more so when the Fed could be considering a shift in monetary policy.

Analysts are predicting 175,000 jobs were created in May. This is lower than the 263,000 jobs created in April but still a respectable number. Analysts predict that hourly wages will increase 0.3%, up from 0.2% the previous month. A weak headline figure could further convince investors that the Fed is heading quickly towards a rate cut. This could pull the dollar lower. On the other hand, a stronger headline number and higher earning would suggest that investors are getting ahead of themselves. The dollar could rise under this scenario.

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 goods 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.

This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Inc., Currency Live or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. Consult our risk warning page for more details.

This article was initially published on from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.