GBP/USD: Federal Reserve & China Trade Talks In Focus

The Australian dollar closed marginally higher versus the US dollar on Monday, snapping a 3 session losing streak. The Australian dollar is seen extending those gains versus the greenback in trading today. The pair pierced through $0.68, hitting a high of US$0.6806.

The Australian dollar is in demand on Tuesday following remarks from the Reserve Bank of Australia’s (RBA) Governor Philip Lowe. Philip Lowe reiterated that the RBA was prepared to loosen monetary policy further if the economy required it, as wage growth has stalled and spending stagnated. Market participants widely believe that the RBA will cut interest rates again, possibly as soon as next Tuesday.

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.

 

Usually if a central bank indicates further rate cuts are coming the currency declines. However, Philip Lowe also mentioned that he believed that the economy was at a turning point. He said he is “expecting a modest pickup in economic growth in the quarters ahead led by low rates, tax cuts, a weaker Australian dollar and government spending”. As a result of his slightly more upbeat tone investors pushed back on rate cut expectations, lifting the Australian dollar.

There is no high impact Australian economic data due to be released over the coming days. Instead any headlines regarding US — Sino trade talks could direct movement in the currency.

Will US Consumer Confidence Lift Dollar?

The dollar traded broadly higher versus its peers in the previous session, as global growth concerns triggered risk aversion. Downbeat manufacturing data from Germany and the eurozone highlighted the negative impact that the ongoing US — Sino trade dispute was having on the global economy. The US dollar is the reserve currency of the world, therefore in times of increased geopolitical or economic stress investors look to the dollar as a safe haven.

Today the dollar is trading flat versus its peers amid increased optimism surrounding US — Sino trade talks and as investors look ahead to US consumer confidence data.

Analysts expect consumer confidence to remain elevated at 133.3 in September just down slightly from 135.1 the month previous. Analysts believe the strong US labour market will continue to underpin consumer confidence, despite the ongoing US — Sino trade dispute. When consumers are confident about their economic position and the outlook of the economy, they spend more. This is good news for the economy and boosts inflationary pressures.

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 USD = 0.6784 AUD

Here, $1 is equivalent to approximately A$0.67. This specifically measures the US dollar’s worth against the Australian dollar. If the Aussie dollar amount increases in this pairing, it’s positive for the US dollar.

Or, if you were looking at it the other way around:

1 AUD = 1.4739 USD

In this example, A$1 is equivalent to approximately $1.47. This measures the Australian dollar’s worth versus the US Dollar. If the US dollar number gets larger, it’s good news for the Aussie dollar.

 

 

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