The pound was well matched against the US dollar on Tuesday. The pound US dollar exchange rate ended the session at US$1.2064, just marginally lower than the level that it started the session. The pair is trading flat early 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 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. |
Signs of a resilient UK labour market supported the pound in the previous session. Job creation was solid, and wages grew at the highest level in eight years. Wage growth increased at a stronger than anticipated 3.9% in the three months to June. This was also ahead of the 3.6% recorded the previous month. 115,000 new jobs were created, this was also ahead of what analysts had forecast. Strength in the labour market is good news for the value of the pound. This is because it creates inflationary pressures making an interest rate hike more probable than an interest rate cut by the central bank.
| 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 data was contrasting to UK GDP data released last week, which showed that the UK economy contracted in the second quarter. Labour market data is a lagging indicator, that said the data is clearly encouraging. The Bank of England will be unlikely to cut interest rates whilst the labour market looks so resilient.
The pound could receive another boost today if UK inflation figures come in ahead of analyst’s forecasts. City analysts are predicting that UK inflation ticked lower in July to 1.9%, down from the central banks’ target level of 2% recorded in June.
Dollar Strengthens On Trade Dispute Optimism
The dollar was in demand in the previous session thanks for stronger than forecast US inflation figures and owing to reports that the US will delay tariffs on some Chinese imports until December. These good include laptops and mobile phones. The Trump administration took the decision to ease fears over the impact of the US — Sino trade war on the US economy. The dollar charged higher on hopes that the two powers will find a way to resolve the ongoing trade dispute, helping the US economy and global economy steer away from a slowdown.
China’s vice premier Liu He, US Trade Representative Robert Lighthizer and Steven Mnuchin US Treasury Secretary, have agreed to speak again in two weeks
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