GBP/USD: US Non-Farm Payroll In Focus

The pound closed flat against the US dollar on Thursday, in a quiet session owing to the US Independence Day public holiday. The pound US dollar exchange rate closed at approximately the same level that it started at US$1.2582. The pound was edging higher versus the dollar in early trade on Friday.

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 was subdued in trading on Thursday. With no high impacting U.K. data released, investors continued digesting the grim figures that had been released across the week. The U.K. manufacturing and construction sector are firmly in contraction whilst the dominant service sector has stagnated. Brexit uncertainty and reduced demand amid fears of a global economic downturn have hit the UK economy across sectors, raising concerns of a contraction in the UK in the second quarter and a possible recession by the third quarter of this year. The could heap pressure on the Bank of England 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 the UK economic calendar is light with just the Nationwide housing price index for pound traders to consider.

The dollar had a quiet previous session as the US financial markets were closed for Independence Day and as dollar investors look ahead to today’s labour department’s job report. Analysts are expecting 164000 jobs were created in the US in June. They also expect average hourly wages to have increased 0.3%.

The jobs report, also known as the non-farm payroll, is always a very closely watched economic release. However, this month it is expected to be under even more scrutiny than usual. This is because last month the Federal Reserve said that it was close to cutting interest rates. How soon it starts to cut rates depends on US data. Employment figures are considered by the Fed as among the most important indicators for the US economy. A weak reading could see investors bring forward their rate cut expectations to July. This could hit demand for the dollar. So far lead indicators, such as the ADP private payroll data and the jobs component of ISM non-manufacturing report have both pointed to a softer reading.

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.

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