Dollar Softer Versus the Pound Ahead of Monthly U.S. Jobs Report

TransferWise content team
07.07.17
4 minute read

Today’s movements in GBP/USD will be all about the non-farm payroll figures from the U.S. However, other headlines will also be expected from the G20 summit in Hamburg, Germany, with political risk raising its head once more this week.

The dollar is on the back foot against the pound going into the monthly jobs report. The pound-dollar exchange rate finished the previous session close to the day’s high in the region of $1.2970, climbing some 50 points throughout the day.

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 U.S. 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 U.S. dollar’s worth versus the British pound. If the sterling number gets larger, it’s good news for the dollar.

The dollar was still under pressure after uninspiring Federal Reserve minutes from the interest rate decision meeting earlier in the week. The meeting left investors with no further clues as to when U.S. interest rates may be increased and highlighted concerns over softer inflation.

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.

Adding to the dollar’s woes were soft private payroll data, which fell short of analysts’ expectation. Only 158,000 new private jobs were created in June, below the 185,000 forecast. The private payroll data is often considered a forecast for the monthly public and private jobs report, the non-farm payroll, which is the highlight of the economic calendar.

The report today is expected to show that 180,000 jobs were created in June and that unemployment continues at the historically low rate of 4.3%.

How does the non-farm payroll (NFP) affect the U.S. dollar?
It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the good and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.

However, the Federal Reserve and analysts are starting to question whether the relationship between low unemployment, high job creation and inflation has broken down, as wage growth fails to pick up at any meaningful level. If the wage growth reading is weak again today, then the dollar could take another step lower as the Fed’s concerns over low inflation are confirmed for another month.

Economic data aside, the markets will also be paying particular attention to the G20 summit. Any increase in geopolitical tensions over North Korea and it’s continued efforts to develop nuclear weapons will be of particular interest. Trump has increased tensions further, saying he is considering some “pretty severe things” for North Korea, in response to the rogue nation’s continued efforts to develop nuclear weapons. Trump’s meeting with Russia’s President Putin will also be under the spotlight. When geopolitical tensions rise the dollar tends to rise as investors seek its “safe haven” status.

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