Recession concerns in the UK sent the pound lower on Wednesday. The pound US dollar exchange rate hit a 2 week low of US$1.2557. The only reason the pair didn’t fall lower was because the dollar was also under pressure.
|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.
Data showing that the dominant UK service sector stagnated in June sent the pound lower in the previous session. The service sector pmi dropped to just 50.1, whereby 50 separates contraction from expansion. The data makes a hattrick of gloomy reading for the UK economy this week UK construction experienced its worst month in a decade in June and manufacturing contracted by more than what analysts had been expecting.
Lingering Brexit uncertainty and concerns over the health of the global economy have caused a gradually deteriorated demand across all sectors in the UK economy. The composite pmi, which tracks activity in the private sector showed that the sector declined for the first time since the Brexit referendum in 2016.
Economists believe that the UK economy will contract in the second quarter. With Brexit uncertainty set to continue across the third quarter, a contraction in the third quarter is a very real possibility as well. Two consecutive quarters of contraction are a recession. The UK is in danger of falling into recession.
The recent data will have piled pressure on the BoE to consider cutting interest rates. As market expectations of a cut grow, the pound sinks lower.
|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 there is no high impacting economic data. Pound traders will continue assessing the pmi’s and the grim outlook for the UK.
The dollar was also broadly out of favour, although less so than the pound. The dollar came under pressure after President Trump tweeted his intention to nominate Christopher Waller and Judy Shelton to vacant posts at the Fed. Both candidates are renowned for the dovish stance, with both vocally supporting rate cuts. Perhaps their nomination isn’t so surprising given Trump’s recent attacks on the Fed for having interest rates too high.
Today there is no high impacting US data for investors to digest. Instead they will look ahead to Friday’s much anticipated non-farm payroll.
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