GBP/USD: Dollar Strengthens On Fears Of China Slowdown

The pound moved higher versus the dollar last week, snapping a four-week losing streak. The pound US dollar exchange rate gained 0.8% closing at US$1.2740. The pound slipped lower in early trade on Monday.

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 USD

Here, £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 GBP

In 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 had a slow start to the previous week after UK manufacturing and construction sector data both showed contraction. The dominant service sector helped increase sentiment, although this was also limited. Whilst the dominant service sector performed better than market analysts had been predicting in May, some pound investors believe that the rebound was insufficient to offset weakness in the other sectors. Either way, economic growth in the second quarter looked lacklustre at best.

Domestic political uncertainty has also weighed on demand for the pound in recent weeks and could continue to do so in the weeks ahead. The UK Conservative leadership battle kick off this week after Prime Minister Theresa May had her last day as Tory leader on Friday. Should a pro-Brexit candidate take an early lead, this could unnerve pound traders. Particularly as the pro Brexit candidate are supporting an exit from the European Union, with or without a Brexit deal.

Today the pound could come under renewed pressure as investors will look towards UK manufacturing and industrial production data. Analysts are expecting month on month declines for both data releases, which will unnerve investors.

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.

Weak NFP Sent Dollar Tumbling

The dollar plunged across the board in the previous week after the Federal Reserve gave off dovish signals. Fed chair Jerome Powell said that the Fed stand ready to support the economy, in the case of a downturn amid the ongoing trade war.

Friday’s US jobs report was surprisingly low at just 75,000 jobs created in May, instead of the 175,000 analysts had forecast. The weak data supported market participant expectations that the Fed will cut interest rates to help support the economy as the trade dispute continues.

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.

A trade truce between the US and Mexico over the weekend was quickly overshadowed by concerns over the health of the Chinese economy. A slew of weak data from China boosted demand for the dollar, with investors seeking its safe haven qualities.

Attention will now turn to US inflation data on Tuesday and Wednesday.

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