Stronger than forecast UK inflation helped the pound advance versus the US dollar on Thursday. The pound US dollar exchange rate rallied 0.2% in the previous session hitting a high of US$1.2149. This is the highest level that the pair has traded at in 4 days.
|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.
U.K. retail sales unexpectedly increased in July lifting the pound. Data showed that retail sales increased 0.2% month on month in July thanks in part to the strongest growth in online spending in three years. Economists had predicted that retail sales would decline -0.2%. The data shows that U.K. consumers continue spending despite the upcoming Brexit deadline. A strong labour market is clearly providing support, with 115,000 jobs created in the three months to June.
The strong retail sales data makes it a hat-trick of strong readings for the pound this week; wages grew at the fastest pace for 11 years; inflation unexpectedly rose above the BoE’s 2% target. In light of the stronger data, investors’ expectations from a rate hike rather than a rate cut from the central bank increased, lifting 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 there is no high impacting UK economic data due for release. Instead Brexit will fall back under the spotlight. However, with a Parliament still on summer recess developments have been slow.
Will US Consumer Confidence Data Support Dollar?
The dollar was in favour in the previous session, albeit slightly less than so than the pound. Strong US retail sales helped boost the dollar. Data showed that US retail sales increased by 0.7% month on month in July. This was ahead of the 0.3% increase economists had predicted.
The better than forecast data soothed investor nerves over the health of the US economy. Whilst the US bond market is flashing recession alarm bells US economic data is still looking resilient. Strong retail sales data shows that the US consumer is not impacted by the US – Sino trade war as the manufacturing sector is.
Today investors will look towards US consumer confidence data. Analysts are expecting confidence to have ticked lower, this could put pressure on the dollar.
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