After holding steady in the previous session, the pound is sinking lower against the dollar on Wednesday. The pound US dollar exchange rate dropped to a low of US$1.2828.
The pound is under pressure in early trade on Wednesday as investors digest Brexit developments and disappointing UK construction data.
The UK construction PMI showed that the contraction in the sector deepened in September. Construction activity declined for a fifth straight month as Brexit uncertainty and weak demand continue to paralyse the sector. The PMI dropped to just 43.3, down from 45 the previous month.
The weak construction PMI figures come after yesterday’s data which showed that the UK manufacturing sector remained in contraction. With Brexit just 29 days away, the UK economy is showing signs of weakness which is unnerving investors.
|Why does poor economic data drag on a country’s currency?|
|Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.|
Investors are now awaiting Boris Johnson’s speech at the Conservative party conference in Manchester. The Prime Minister will reveal his final offer over Brexit and his plan to resolve the Irish border issue, in a last-ditch attempt to avoid a no deal Brexit. Leaked documents have so far not been well received by EU and Irish diplomats to the UK. This has also weighed on the pound this morning as fears grow over a disorderly Brexit.
|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.|
Will US Private Payroll Data Lift Dollar?
The dollar dropped sharply in the previous session after weak US manufacturing data sparked recession fears. US manufacturing output fell for a second straight month in September to 47.1. This was well below the increase to 50.1 that analysts had predicted. 50 is the level that separates expansion from contraction. This was weakest level of output for a decade, as the manufacturing sector comes under strain from the ongoing US — Sino trade dispute and slowing global demand. The weak figures have forced dollar investors to assume of greater probability of the Federal Reserve cutting interest rates again.
Investors will now look ahead to the release of US ADP private payroll figures. These will be closely watched because of its strong correlation to the US non-farm payroll on Friday, the most closely followed macroeconomic statistic.
|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.