GBP/USD: Pound Sub $1.26 On Dovish Carney

The pound dropped sharply versus the US dollar in the previous session. Weak UK construction pmi combined with a gloomy outlook from the Bank of England Governor Mark Carney, sent the pound tumbling. The pound US dollar exchange rate dropped to a low of US1.2585. The pound is losing ground again in early trade on Wednesday.

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.

Tuesday went from bad to worse for the pound. Data showing that the UK construction sector experienced its worst month in June for 10 years, sent the pound tumbling early on in the previous session. The UK construction pmi dropped to 43.1, well short of the 49.2 analysts forecast. The data comes hot on the heels of UK manufacturing pmi which also pointed to a marked slowdown in the manufacturing sector.

Brexit is hitting the economy from all angles as businesses hold off from investments. In the construction sector, commercial building was lower for the sixth straight month. However, home building contracted for the first time in 17 months as Brexit uncertainty dominates.

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.

BoE Governor Mark Carney was also responsible for sending the pound tanking later on in the session on Tuesday. Mark Carney warned that the ongoing trade war could “shipwreck” the global economy in a similar way that Brexit impacted the UK economy. His comments sparked market expectations of a BoE interest rate cut later this year, sending the pond plummeting.

Today investors will look towards the pmi for the dominant UK service sector. Analysts are expecting the reading to remain steady in June at 51. A weak reading could send the pound lower still.

Dollar Eases As Trade Optimism Ebbs

The dollar remained elevated in the previous session, although lost some of its shine as investor optimism over trade ebbed. Whilst the US had agreed to a trade truce with China over the weekend, the US was once again setting its sights on Europe, with threats of additional tariffs. The US’songoing trade dispute on multiple fronts is negatively impacting the US economy. The Fed stand ready to cut interest rates.

Why do interest rate cuts drag on 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. Lower interest rate environments tend to offer lower yields. So, if the interest rate or at least the interest rate expectation of a country is relatively lower compared to another, then foreign investors look to pull their capital out and invest elsewhere. Large corporations and investors sell out of local currency to invest elsewhere. More local currency is available as the demand of that currency declines, dragging the value lower.

Today dollar traders will digest a slew of US data including factory orders and ISM non-manufacturing figures. Today’s readings will provide strong clues as to the health of the US economy before Friday’s all-important non-farm payroll on Friday.

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