A focus on central banks on both sides of the Atlantic pushed the pound US dollar exchange rate to a high of US$ 1.2695 overnight and a close of 0.8% higher.
|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 barely reacted to the third round of voting in the Conservative leadership contest. Rory Stewart, who had gained momentum in the second round of votes, achieved the fewest votes. After a poor performance in the second televised debate Rory Stewart dropped 10 votes to achieve just 27, knocking him out of the competition.
Favourite Boris Johnson picked up more votes winning 143, up from 126 in the previous round. Pro-Brexit Johnson made an appearance at the second televised debate and made it clear that he would take the UK out of the EU on the 31st of October, regardless of whether there was a deal or not. Previously, as Boris Johnson gained ground and the fear of a no deal Brexit picked up, the pound had sunk lower. Not on this occasion, thanks to the Bank of England (BoE).
Investors have been looking ahead to the BoE monetary policy announcement today. Analysts are not expecting the central bank to hike rates. However, they are expecting a less dovish sounding BoE thanks to inflation remaining on target at 2% and wage growth strong. The central bank assume that strong wage growth will lead to higher inflation going forwards. This could boost the pound, particularly as other central banks across the globe are looking to loosen monetary 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.|
The dollar fell sharply on Tuesday and is also falling in early trade on Thursday, as investors digested a more cautious sounding Federal Reserve. As analysts had expected the Fed didn’t cut interest rates. However, Fed Chair Jerome Powell gave a strong indication that he stands ready to cut interest. The US central bank downgraded its description of the US economy, pointing to rising uncertainties over the economic outlook. Even as the Fed set the stage for possible monetary stimulus, economic projections released by the central bank suggested this may not happen until next year. Much later than what market participants have been expecting.
Today investors will continue digesting the Fed’s report in addition to looking towards jobless claims data.
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