Stronger than forecast UK inflation data, combined with a flight to safety amid increased global recession fears meant that the pound US dollar exchange rate was well matched on Wednesday. The pair closed flat at higher at US$1.2059. The pair is edging lower in early trade on Thursday.
| 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. |
UK inflation data gave the pound a small boost in the previous session. UK inflation as measured by the consumer price index (CPI) unexpected increased to 2.1% in July. Analysts had predicted a decline to 1.9%. This means that inflation in July was above the Bank of England’s 2% target despite the central bank forecasting that inflation will decline to 1.6% by the end of the year.
With inflation above the BoE’s target level, the central bank will be more inclined to raise interest rates rather than cut rates. The prospect of higher rates boosted 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. |
Today investor attention will remain on the UK economic calendar. UK retail sales are due to be released. Analysts are predicting that retail sales declined -0.2% month on month in July. This would mark a significant decline from June’s increase of 0.9%. Should retail sales be stronger than the -0.2% forecast the pound could rally. This is because economists consider retail sales to be an indication of future inflation.
Dollar Strengthens On Global Recession Fears
Demand for the dollar was moderately stronger in the previous session. Following weak economic data from China and Germany fears of a global recession grew. Investors looked towards the dollar, the reserve currency of the world as a safe haven in times of potential economic (and political) insecurity.
On the other side of the coin, some dollar investors are selling out of the dollar. This is because fears are also growing that the US — Sino trade dispute is negatively impacting the health of the US economy. If this is the case, then the Federal Reserve will be looking to cut interest rates again in the coming months.
Today investors will look towards US retail sales data. Analysts are predicting retail sales to have increased a reasonable 0.3% month on month in July, slightly down from 0.4% growth the month previous. Given how sensitive the markets are over economic slowdown fears, a weak reading could have a big impact.
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