After shedding 1% across the previous week, the pound clawed back some of those losses on Monday. The pound US dollar exchange rate rallied 0.5% in the previous session to close at US$1.2078. The pair is holding steady ahead of some big releases on from both the US and the UK on Tuesday.
| 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. |
With no fresh Brexit news or UK economic data in the previous session the pound was able to pare some of the steep losses from the previous week.
Today pound investors will look towards UK labour market data. Analysts are forecasting that the UK unemployment level will remain steady at multi decade lows of 3.8%. Analysts also estimate that UK average wages will have increased 3.8% year on year in the three months to June. This would be well ahead of the 3.6% growth that employees experienced in the three months to May, which was the fastest pace of growth for wages since 2008. Strong wage growth is an inflationary factor which could offer support to the pound.
| 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. |
Wages data will be released just days following figures which showed that the UK economy contracted in the first quarter. UK labour market data is a lagging indicator. This means that any slowdown in the UK economy could be seen in later months in the labour market report.
Brexit will also remain at the forefront of traders’ minds. However, with Parliament closed for summer recess, Brexit developments are few and far between right now.
Will US Inflation Data Pull Dollar Lower?
The dollar was out of favour in the previous session amid growing pessimism surrounding the US — Sino trade war. Fears are growing that the ongoing trade dispute will have a negative impact on the US economy.
Today dollar investors will look towards US inflation figures. Analysts are expecting US inflation, as measured by the consumer price index (CPI) to remain steady at 2.1% on an annualised basis. On a monthly basis, market participants are predicting a 0.2% increase in July, slightly short of the 0.3% increase in June. Should US CPI be weaker than what analysts were predicting the value of the dollar could fall. This is because weaker inflation means the Federal Reserve is more likely to cut interest rates in a falling interest rate environment. Given the growing fears of a US recession, investors could be more sensitive than usual to soft data.
| 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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