Pound Dives 1% Against Dollar Ahead of US Jobs Report

06.10.17
4 minute read
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Fears over political stability in the UK pulled the pound down over 1% points lower versus the US dollar. Heading into the close of the trading session on Thursday, the pound US dollar exchange rate was trading at $1.3120, wiping out all the gains for sterling since September 14. This was the date when the Bank of England (BoE) hinted at an interest rate hike possibly as soon as November. Sterling is now trading at an almost its lowest in one month versus the dollar.

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.

The UK Conservative Party conference once again proved to be toxic for the pound. Last year the pound dived 6% following UK Prime Minister Theresa May’s speech at the conference. In the aftermath of her speech this year too, the pound has been very much out of favour. It certainly hasn’t dropped 6%, but it did dive over 130 points thanks to May’s poor speaking performance, which saw her cough and splutter to the end. Rumours have now started circulating that Theresa May’s own party will ask her to step down, potentially creating huge political instability in the UK. The thought of a leaderless Britain and a leadership battle at this stage during the Brexit negotiation process is a cause of great concern for buyers of 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.

With little economic data to move the pound today, investors will instead focus on the US non-farm payroll for inspiration.

Will US non-farm payrolls be as low as analysts are forecasting?

The US Department of Labour’s job report today, also known as the non-farm payroll, is the highlight of the US economic calendar. This month’s reading has the potential to be distorted more than usual, thanks to recent hurricanes which hit the US. However, the broad consensus by analysts is that about 80,000 jobs were created in September, down from 156,000 in August. The unemployment rate is due to remain at 4.4% while analysts forecast that the average wage growth picked up to 0.3% month on month, up from 0.1% in August.

So, while job creation looks very low compared to the 182,000 average over the last 2 years, the wage growth figure is encouraging. This may point to the labour market finally reaching a level where wages start to move higher; at a pace that the US central bank are more comfortable with. Should this actually be the case, the dollar could rally significantly higher, as investors’ perceived odds for an interest rate hike increases.

How does the non-farm payroll (NFP) affect the US 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 up the currency’s worth.
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