GBP/USD: Low UK Data & Trade War Fears Lowers Pound vs Dollar

The pound US dollar exchange rate ended Thursday’s session at roughly the same level that it started at US$1.2143. The pound was out of favor over Brexit, whilst the US dollar lost ground as flows into safe havens declined. The pound US dollar exchange rate is steadily gaining 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 experienced some volatility in the previous session, once again driven by Brexit. The outcome of Brexit is so important for the economy and therefore the pound, that pound traders are jumping from headline to headline. In the previous session the pound dipped lower as investors digested reports that Boris Johnson could opt to hold a general election on 1st November. This would be too late to stop a no deal Brexit.

Today pound investors will switch their focus back to the UK economic calendar. Today there are several high impacting UK data releases. The most important, will be UK GDP. Analysts are expecting UK economic growth to have stagnated, with 0% growth month on month. On an annual basis analysts’ are forecasting growth of 1.4%, down from 1.8%.

Whilst stockpiling for Brexit deadlines (29th March, 12th April) helped boost economic growth earlier in the year, that is unsustainable. Even Bank of England Governor Mark Carney is echoing expectations of weaker economic growth as Brexit fears infiltrate through the economy. A weaker than expected reading could send the pound lower on heightened recession fears.

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.

Dollar Eases As US- Sino Trade Dispute Headlines Fade

The dollar eased back on Thursday as headlines regarding the US- Sino trade tensions declined and as President Trump continued to attack the Fed over its rate setting policy. He said that the Fed’s decisions have been wrong at every step. Trump ramping up pressure on the Fed for a weaker dollar is weighing on demand for the greenback.

Today, US dollar investors will look towards US producer price index (PPI). This is inflation as factory level. Analysts are expecting PPI to have ticked higher month on month in July to 0.2%. Stronger PPI could give the dollar a boost. This is because strong inflation at factory level points to increasing inflation at consumer level. When inflation picks up at consumer level there is less probability of the Fed cutting 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. 


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