Pound Below $1.34 Versus Dollar; Eyes towards UK Tory Party Conference

02.10.17
4 minute read
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As trading begins for the new week, the pound continues to struggle against the force of the dollar. The pound fell over 0.7% against the dollar over the course of last week, and is a further 0.35 lower heading into Monday. The pound US dollar exchange rate is trading at US$1.3365.

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.

Brexit headlines caused some volatility for the pound last week, and politics will remain the focus at the start of the new week as well. The UK Conservative Party Conference continues amid speculation over UK Prime Minister Theresa May’s leadership abilities and differing visions within her Party over Brexit. Theresa May is expected to use the conference to launch new initiatives in order to win back some of her declining popularity. Meanwhile, the UK Foreign Minister Boris Johnson continues to express his unhappiness over the direction of Brexit negotiations with the EU.

UK Chancellor Philip Hammond is due to speak tomorrow while Theresa May is expected to speak on Wednesday. Pound traders will be looking out for any further clues over Brexit, in addition to any signs that Theresa May is strengthening her political position. The more stable her position and government appear, the better it is for the pound.

How does political stability boost a currency?
Political stability boosts both consumer and business confidence, which means corporations and regular households alike are more likely to spend money. The increased spending, in turn, then boosts the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. For foreign investors to put their money into an economy, they need local currency. As they acquire the money needed, the demand for that particular currency increases, which then boosts its value.

This week is also the first week of the month, so there will also be all the usual manufacturing, construction and service sector economic trends data releases, which could create volatility for sterling.

Can the dollar continue its recent rally?

The dollar strengthened considerably throughout last week as the market received a big hint by US Federal Reserve Chair Janet Yellen that the central bank could still raise interest rates in December. Usually, when the odds of a US interest rate hike increases, so does the dollar’s worth. Furthermore, the market also received an announcement by US President Trump that a tax reform is on its way, which should boost the US economy. Generally, when an economy looks set to strengthen, the currency strengthens. There were moments of doubt last week as to whether these could be achieved; but overall, and for the time being, dollar investors are giving the benefit of the doubt to these plans.

This week will be another big week for the dollar, with plenty of high impacting data releases. The highlight will be the US jobs report on Friday. Prior to that, Janet Yellen will speak on Wednesday and today investors will look forward to the release of manufacturing data for clues about the health of the US economy. Strong numbers in this data could help boost the dollar further versus the pound.

Why does strong economic data boost a country’s currency?
Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.
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