Brexit fears sent the pound through US$1.24 to a 27-month low on Tuesday. The pound US dollar exchange rate hit a low of US$1.2397 before lifting slightly towards the close. The pair was trading marginally above US$1.24 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 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 plunged in the previous session as Brexit concerns overshadowed a solid UK jobs report. UK unemployment remained steady at 3.8% a multi-decade low. Wages grew at the fastest pace in 11 years as data showed that the UK job market remains resilient ahead of Brexit. Basic wages jumped 3.6% annually in the three months to May. This is well ahead of inflation which currently sits at 2%. Wage growth outstripping inflation by such a large margin would usually send the pound sharply higher.
However, investors were far too preoccupied with Brexit to cheer a solid jobs report. Both remaining candidates for the Conservative leadership contest, Boris Johnson and Jeremy Hunt both said they oppose the Irish backstop ending the pound lower. The EU are not willing to renegotiate the Brexit deal. This means that there are two alternatives, no deal Brexit or no Brexit. Given that both leaders are in favour of Brexit, a disorderly exit from the European Union is looking increasingly more likely. This is the least favourable outcome for UK businesses, the UKK economy and therefore the pound.
Today UK inflation could help support the pound, Analysts are forecasting inflation to remain at 2%. Core inflation, which excludes more volatile items such as food and fuel it expected to increase. Higher inflation increases the chances of an interest rate hike, which could support the pound.
|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 extended gains in the previous session amid strong corporate earnings and better than forecast retail sales. Retail sales increased 0.4% month on month, in June, well ahead of the 0.1% analysts had forecast. Investors cheered the fact that consumers were spending more. Strong retail sales often indicate stronger future inflation.
The strong retail sales data comes following stronger than forecast inflation data last week and a solid US jobs report earlier in the month. Given the recent bout of encouraging data investors pushed back on expectations of a Fed rate cut, lifting the dollar.
Today housing starts data could catch investors’ attention, in addition to more corporate earnings on Wall Street. Strong numbers from companies also gives an indication as to the health of the economy and hiring prospects going forward.
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