usd-100-bank-notes - USD

The pound lost ground versus the dollar at the start of last week. However, over the second half of the week, the pound US dollar exchange rate pared losses to finish the week 0.4% higher. The pair closed at U$1.2575, its highest closing level in over a week. The pound was marginally lower versus the US dollar 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 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 had a slow start to the previous week. However, stronger GDP data than what analysts were forecasting helped lift the pound in the second half of the week. Economic growth in the three months to May was 0.3%, above the 0.1% analysts had forecast. This means that there is a good chance that the UK economy avoided a contraction in the second quarter. Market participants had been predicting a contraction in the second quarter and a recession by the end of the third quarter amid lingering Brexit uncertainty and slowing global demand.

With the results of the UK Conservative leadership race not until 22nd July, investors will continue to focus on UK economic data this week. Tuesday sees the release of UK jobs data. So far, the UK labour market has remained resilient as firms continue to hire, despite Brexit. Any signs that companies are starting to ease back on hiring could send the pound lower.

How does strong jobs data boost the currency?
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 the worth of the currency higher.

Dollar Steady mid A Lack Of Drivers

The dollar sunk lower in the previous week after US Federal Chairman Jerome Powell as good as confirmed an interest rate cut in the July when he testified in front of Congress. The minutes from the last policy meeting which were also released last week painted a similar picture. Not even stronger than forecast inflation data managed to persuade dollar trades otherwise.

At the start of this week there is a lack of catalysts to drive the dollar. Investors will be waiting for US retail sales on Tuesday for further clues as to the health of the US economy. Investors will want to see whether the strong labour market is being reflected at the tills. Analysts are expecting retail sales to have increased just 0.1% month on month in June, down from 0.5% the previous month. Economists believe that weak retail sales indicate weak future inflation. This could bring the dollar lower as lower inflation supports a rate cut.

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.

This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Inc., Currency Live or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. Consult our risk warning page for more details.

This article was initially published on from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.