Pound vs. Dollar Showing Strength Ahead Of US Rate Decision

01.11.17
3 minute read
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The pound gained over 0.5% versus the dollar on Tuesday as investors remained hopeful of the Bank of England (BoE) hiking interest rates. Sterling hit a two-week high against the US dollar at US$1.3292.

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 pound found support once again on hopes that the BoE could raise interest rates when they meet on Thursday. The market is placing an 88% probability on the central bank lifting the interest rate for the first time in a decade. Analysts are forecasting an increase from the current rate of 0.25% to 0.5%. This would take the interest rate back to the level that it was prior to the Brexit vote in June last year, which remains historically low.

This week little has been able to deter investors from assuming the hike will happen. Economic growth figures last week beat analyst expectations, and this has cemented the idea of a possibility of interest rate hike in investors’ minds. Even news that consumer sentiment has worsened in October failed to impact the pound.

Come Thursday investors will be watching intently for the rise, but they will also be listening carefully to the tone of the central bank. Investors will be keen to see if the hike is just a one-off, or if the central bank may consider hiking again next year. Any indication of further hikes to come could see the pound continue to rally.

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.

US FOMC Decision Time

The US Federal Reserve will give their monetary policy decision today, although analysts are not predicting any change in policy. Investors are anticipating that the Fed will hike rates in December for the third time this year.

Fed Chair Janet Yellen is reaching the end of her reign. November’s meeting will be her penultimate, with her last meeting scheduled in December. With that in mind, investors may not be paying as much attention to what she has to say as they normally would. Quite simply because she will not be in the position of power come February next year. Instead, investors could pay more attention to who President Trump is considering to put in her place. President Trump’s announcement is due on Thursday and Jerome Powell remains the current favourite.

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